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New Delhi: Worried over
valuation losses at the Indian stock exchanges, the central
government Sunday allowed qualified foreign investors (QFIs) to
directly invest in equity markets to decrease volatility.
"In a major policy decision, the central government has decided to
allow qualified foreign investors (QFIs) to directly invest in
Indian equity markets in order to widen the class of investors,
attract more foreign funds, and reduce market volatility and to
deepen the Indian capital market," a finance ministry statement
said.
The distinction of a QFI ranges from an individual to a group of
investors that comply with the international standards of the
financial action task force (FATF).
The move is also important because currently only foreign
institutional investors or sub-accounts (FIIs/sub-accounts) and
non-resident Indians (NRIs) were allowed to directly invest in
equity markets.
"As a first step in this direction, QFIs have been permitted
direct access to Indian mutual funds schemes pursuant to the
2011-12 budget announcement. As a next logical step, it has now
been decided to allow QFIs to directly invest in Indian equity
market in order to widen the class of investors, attract more
foreign funds, and reduce market volatility."
The significant step comes after the country's equity markets saw
a huge plunge because FIIs, who had pumped the market in 2010 with
a net investment of $29.36 billion in equities and $10.11 billion
in debt instruments, turned net sellers in 2011.
Their net sales were worth $357.8 billion in equity and $3.4
billion in debt.
Due to this, the 30-share sensitive index (Sensex) of the Bombay
Stock Exchange (BSE), which stood at 20,389.07 points as on Dec
30, 2010, lost a whopping 4,934.15 points during 2011 to close at
15,454.92, with a loss of 24.20 percent.
The story was similar At the National Stock Exchange (NSE) with
the S&P CNX Nifty ending 2011 at 4,624.30 points, against 6,134.50
points at the close of 2010, with a loss of 1,510.20 points, or
24.1 percent.
At the BSE, the Sensex had gained 17.43 percent in 2010 and 81.03
percent in 2009, in what was its best performance since 1999,
after losing 52.45 percent the year before, when it logged the
third worst performances among indices in emerging markets.
For many FIIs, economic woes in their home markets, especially due
to the European debt crisis and a perceived policy paralysis in
India following a string of scams, exacerbated their pull-out.
A Reserve Bank of India (RBI) estimate says that a 10 percent
fluctuation in FII investment results in a 35 percent variation in
stock prices.
The QFIs would be allowed to invest in the equity markets through
the Securities and Exchange Board of India (SEBI)-registered
qualified depository participants (DP).
"A QFI shall open only one demat account and a trading account
with any of the qualified DP. The QFI shall make purchase and sale
of equities through that DP only.Upon receipt of instructions from
QFI, DP shall carry out the transactions (purchase/sale of
equity)."
The statement added that the SEBI and the Reserve Bank of India (RBI)
are expected to issue relevant circulars to operationalise the
scheme by Jan 15, 2012.
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