The bulk of this investment could be in the fixed income space, reckon experts, particularly in government securities (G-secs). “India’s government bonds are stable, offer attractive yields, and may see significant investment, leading to higher demand for such bonds.”
“Central banks will prefer to invest in sovereign securities which are easy to get in and get out of and come with zero credit risk. Worldwide, interest rates are in the negative zone, but India is still attractive, with real interest rates in the range of 3.5 per cent and 4 per cent. These banks would be comfortable taking naked positions on G-secs, given the stability on the fiscal, macro, and currency fronts,” added Ajay Manglunia, managing director and head - institutional fixed income, JM Financial.
The yield on India’s 10-year G-secs
stood at 6.56 per cent on Thursday.
To be sure, some of these countries already invest significant amounts, primarily in Indian equities, through their sovereign wealth funds (SWFs). Abu Dhabi Investment Authority, for instance, often ranks among the top SWFs investing in Indian shares.
Doing away with the need for broad-basing of funds is expected to attract several new offshore funds to the country and spur inactive funds into action.
“Removal of broad-based requirement for obtaining Category II licence has been a long-overdue industry demand. Previously, it was difficult for any fund, albeit with deep pockets, to obtain a Category II licence because of the need to have at least 20 investors. With this requirement done away with, we may see an influx of fresh foreign money making its way into the Indian capital market, and a surge in the number of FPIs,” said Neha Malviya, director, Wilson Financial Services.
According to market observers, 600-700 funds have registered as FPIs in the past 2-3 months but are yet to invest owing to regulatory uncertainty. These funds were spooked after the Union Budget made the surcharge hike applicable for FPIs registered as trusts. Sebi’s recent announcement will give some comfort to these investors and boost FPI flows, especially if the tax surcharge issue is addressed, believe experts.
“The broad-based criteria have passed their necessity as a basis to establish diversified ownership. Accepting global standards, where flows are accepted on the basis of whether a fund is regulated and from a pedigreed jurisdiction, should be the norm,” said Sameer Gupta, partner-financial services, EY India.
Risk-based profiling and aligning the FPI categories on that basis is also a big step, and will make it attractive for long-term investors such as university and pension funds to come to India, he added.
FPIs may be re-categorised into two categories — Category I and II, instead of the present requirement of three categories. According to the current norms, Category III investors have to share additional documents with the regulator, including financial statements, and their investments face greater restrictions.
Another relief comes in the form of allowing offmarket transfers by an FPI to any domestic or foreign investor. “There was no mechanism available to an FPI to get rid of any stock that has either become illiquid or been suspended for certain reason. FPIs shall now have the flexibility to offload suspended or illiquid stock by way of an offmarket transfer to any domestic or foreign investor. The consideration and valuation aspect around such transfers needs to be devised,” said Malviya.