More Foreign Investment Into The Capital Markets

[wolverine]

Mutual Funds can now get direct money from foreign investors in equity schemes. What does this mean? Till now, foreign investors couldn't invest directly in equity markets, or in mutual funds

Only NRIs and PIOs - those of Indian origin, essentially - could buy mutual funds or equity, subject to certain restrictions. Others had to either buy ADRs on the US exchanges, or buy into an exchange traded fund there which could buy in as a "Foreign Institutional Investor (FII)". FIIs are allowed to directly buy equity or mutual funds here.

Now, foreign individuals and companies can directly buy equity mutual funds. This is great, but it's restricted to equity funds only (they can still not buy our juicy debt market).

Every person that registers will need to provide KYC details; which means an agreeable ID Proof and address proof. Current mutual fund guidelines by SEBI/AMFI require a PAN card, and require certain forms of address proof for KYC - this will need to be modified.

Also the new rule may not change anything for US residents; the US SEC restricts them from investing in mutual funds which have presence in the US, because all securities sold by such companies must take SEC approval and Indian mutual funds can't get such approval. That includes funds like IDFC,Franklin Templeton, Fidelity etc. One company that is exempt is Reliance Mutual Fund, which is not present in the US, and therefore US residents can buy its funds. This is true, currently, for HDFC Mutual Fund as well. Those will benefit more because a number of US investors will want to bite into the India equity pie as well.

The other big positive is the increase in FII limits of the corporate bond investment in the five-years-or-more variety, currently at $5 billion, to $25 billion. So FIIs can buy $25 billion of infrastructure company bonds (5 years or more to maturity). Unfortunately individuals can't buy these bonds.

But the downside is that the limit applies only to 5 year+ money raised by infra companies. That shuts off bonds by banks, NBFCs and most corporate, where the investment is capped at a total of $15 billion to FIIs; even that is auctioned away. Plus, the FII investment limit in government bonds has not been changed at all; with yields still high for government bonds, the restriction seems impractical.

From a stock perspective, the positives in this are all the mutual fund companies that have operations abroad, which includes most financial institutions today. Specifically positive are HDFC and Reliance, though there may be others that fit these criteria.

Foreign investments will help the equity markets, but at a time when growth is returning to the west, you may not find as many takers as earlier.