At the Greenwich Economic Forum earlier this month, I participated in a roundtable event on the opportunities and challenges currently facing investors looking to access India. A number of investors seem to be caught between Prime Minister Narendra Modi’s optimistic rhetoric and ambitious targets on the one hand, and a slowdown in the economy on the other. A lack of clarity, and to some extent, education, about the latest market developments, could be off-putting to otherwise bullish investors. But India does appear to be taking steps to convince potential foreign investors that it is easier to do business than it might have been in the past.
The scene is set for reform and growth
Since the conclusion of India’s elections earlier this year, Modi has been on another campaign trail: a mission to tell the world about the reforms and policies that he hopes will transform India into a USD5 trillion economy in just five years’ time.
Modi has called directly on India’s states to drive the growth needed to transform the country’s economy, but the government is looking beyond its own borders as well.
Foreign investment in India right now has never been more welcome. India received its highest ever foreign direct investment (FDI) inflow during the year ending March 2019, and there have been some notably punchy investments by international investors. The world’s largest ever e-commerce deal, the USD16 billion acquisition of Flipkart by US-behemoth Walmart last year springs to mind. But historically not all foreign investors have found it quite as easy to invest in India.
The old world order
A complex system of category classifications, each with different rules, requirements and restrictions, made it difficult for some foreign investors to access the Indian markets, and in some cases prevented it entirely. Procedures were put in place in 2014 by the Securities and Exchange Board of India (SEBI) aimed to simplify access for foreign portfolio investors (FPI’s) looking to access the equity, fixed income, and derivative markets. But although substantial improvements on the time-consuming and even more complex foreign institutional investors (FII) regime that preceded it were made, there were still areas that could be improved.
One of the most significant issues for foreign portfolio investors in recent years was a criteria that funds be “broad-based”. In order to be classified under the preferred Category I or II FPI route, funds were required to consist of no fewer than twenty investors, with no given investor holding more than 49 percent of the fund. This meant that funds with cornerstone investors, or other structures such as funds-of-one, had to access portfolio investments via the Category III license which required additional KYC, had lower thresholds for onshore listed derivative trading, and were generally perceived as high risk.
For investors looking for a stable, long-term investment trajectory, these criteria were hard to swallow. It seemed to invite the question: if it’s so hard to get in, how hard will it be, when the time comes, to get out? And for investors looking to move at pace, the complexity of access remained a particular challenge to navigate.
A streamlined and more open approach
Investors and institutions voiced their concerns and SEBI listened. In 2018, SEBI commenced a review into the regulations governing Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). Following a public consultation, the changes that were recommended came into effect in September 2019 and they now aim to demonstrate firmly to foreign investors that India is open for business.
For the first time, foreign portfolio investors can access financial instruments such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Significantly, the broad-based requirement has been removed, allowing funds with more varied structures and investor bases to come to the table with less documentation. The Know-Your-Customer (KYC) requirements have been streamlined and the process for application made more straightforward and efficient. With many more investment opportunities available, and a simplified route to access them, it is a sign that India is moving towards a more open and global outlook.
Other changes include increasing the default limit for FPI investment in Indian equities and relaxing the restrictions for non-resident Indian (NRI) investors. The default investment limit moves from a cap of 24 percent into line with sectoral limits, improving the scope of access whilst providing greater transparency for SEBI. These reforms expand the potential investor audience, and with a greater pool of market participants will come improved liquidity and price discovery for both underlying instruments and their associated derivatives, ultimately fueling market growth.
Looking to the future
Taking the Indian fixed-income market as an example, and given the low-yield environment in much of the G10, access to a growing Indian corporate debt market which has been bolstered by government infrastructure projects will be attractive to a new pool of investors who are reassured by the framework of an economy with a stable monetary regime in comparison to its similarly yielding peers. It will be interesting to see whether these latest reforms sufficiently transform its ease of doing business for foreign investors, and ultimately contribute to the economic growth the country so keenly seeks.
It’s still early days since these reforms have been implemented, but with an economy that really needs a boost right now, India will be hoping that Foreign Portfolio Investors who were ineligible, or found that they couldn’t access the types of investment they were looking for, might stop and look again.