Qualified Foreign Individual (QFI) Investment in India

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Foreign capital inflows to India have significantly grown in importance over the years. Ministry of Finance in India has already permitted QFIs to have direct access to mutual fund schemes in India as per Budget announcement of 2011-12. With starting of this new year, Foreign individual investors, pension funds and trusts have been allowed to directly invest in equities in India. This seems to be a next logical step after QFIs were allowed to invest through mutual funds in Indian capital markets earlier last year.

Qualified Foreign Individuals (QFIs):

QFIs include individuals, groups or associations of a foreign country that is compliant with Financial Action Task Force standards of the government.

Considering the global downturn caused by Euro zone crisis, which has led to pulling money out of Indian equities by foreign investors, The move will broaden the areas of investment for investors, attract more foreign funds and market volatility would decrease as compared to 2011.

The scheme will come into operation i.e. January 15, 2012 after the RBI and SEBI issue detailed circulars for the same.

The individual and aggregate investment limit* would be capped at five per cent and 10 per cent of the Indian company’s paid-up capital, respectively, for investors.

(*Limits does not include FII and NRI investment ceiling.)

Highlights of QFI Scheme:

QFIs can only invest through qualified depository participants (Dps) registered with SEBI. The permission under the Portfolio Investment Scheme has to granted by RBI to QFIs for investment similar to FIIs.

The QFI can make transactions in equity only through one D-MAT and one Trading Account. And that account has to be opened with any qualified DP.

Before making any redemption payments to QFIs, DP to be responsible for deducting TDS.

Reasons for launching the scheme:

The move comes against the backdrop of significant foreign capital outflows from the domestic equity market in recent times, which has resulted in rupee volatility. After foreign institutional investors (FIIs) turned net sellers in the Indian stock markets in 2011, the finance ministry came out with a channel to keep market volatility under control in 2012.

The global downturn caused by Euro zone crisis.

Issues to be considered:
In the absence of a direct route, many QFIs may face difficulties in investing because a large number of diversified QFIs and foreign nationals who are desirous of investing in the Indian equity market, don't have direct access to the market. They come through sub-account route.

May not lead to any immediate inflow of funds into equity markets and may not interest foreign investors as far as companies already listed on foreign stock exchanges through ADRs and GDRs are concerned.

Last Updated on 1/3/2012