Complexities may hinder India’s QFI reforms

New rules from the Securities and Exchange Board of India that opened up the country’s bourses to foreign investors from this week, are a move in the right direction, but look unlikely to have a major impact on trading or market conditions.


New rules from the Securities and Exchange Board of India (SEBI) that opened up the country’s bourses to foreign investors from this week, are a move in the right direction, but look unlikely to have a major impact on trading or market conditions. 

Indian markets lost around a quarter of their capitalisation last year and the rupee tumbled, prompting moves to loosen the tightly-regulated exchanges in an attempt to attract more foreign capital.

“Over the last few years there have been steps in the right direction, such as smart order routing and allowing direct market access. SEBI is thinking in right fashion, but these new rules don’t go far enough,” suggests Hirander Misra, former COO of pan-European multilateral trading facility Chi-X Europe and now head of his own consultancy, Misra Ventures, which is working on projects with Indian exchanges.

Qualified foreign investors (QFI) will now be able to ‘directly’ buy Indian stocks, but the processes are still far from straightforward, requiring a depository participant (DP) to send orders to a broker, and the opening of a dedicated demat account for transactions. Only one demat account may be opened and all trades must be put through one DP, though QFIs may open multiple trading accounts. Individual QFIs will not be able to hold more than a 5% shareholding in any one stock and aggregate QFI shareholdings cannot exceed 10%. When an aggregate QFI shareholding in a stock reaches 8%, depositories will have to publish the name of a stock in a ‘caution list’ and grant approval for further purchases.

Nevertheless, Citibank, HSBC, SBI SG, as well as locals Kotak Manhindra Bank and India Infoline have registered with SEBI for the new QFI scheme.

With other ways of accessing Indian equities available to overseas investors, the new rules probably won’t be the harbinger of an inflow of global capital into markets.

“Those interested in Indian blue chips can get access through vehicles including ADRs and there are also emerging market exchange-traded funds (ETFs),” points out Misra. “And you still need to have a demat account even if you’re an individual retail investor.”

“It will not be a straightforward process for overseas investors to invest directly in the Indian market, having to face account opening and FX issues as well as tax consequences,” adds Joseph Ho, head of ETFs for Asia-Pacific at Credit Suisse. “Moreover, if you are a retail investor who just wants to get general exposure, using an ETF is probably sufficient. Of course, those professional asset managers with expertise in picking stocks may want to go down the direct access route; though overall cost efficiency and convenience are side factors to be considered.”

The trading environment as a whole is ripe for improvement, according to Misra, who cites high latency, near monopolies and high trading taxes as immediate problems.

“However, the need for deregulation and more competition is recognised by the government and regulators,” Misra says.

With the market having probably bottomed out, the weak rupee and room for big changes in the trading infrastructure, the current situation is a good opportunity to move into Indian bourses, suggests Misra. 

With the Delhi Stock Exchange having signed up for the LSE’s Millennium Exchange platform for equities, derivatives and FX trading at the end of last year, signs of real change may soon be on their way.