So far only non-resident Indians and registered foreign institutional investors and their sub-account could invest directly in the market. From January 15, 2012, foreign retail investors can also invest in Indian equities through the Qualified Foreign Investors (QFI) route. The QFIs who meet ‘know your customer’ requirements are likely to be allowed to directly invest in Indian shares.
Each QFI can hold up to 5% of a company’s paid-up capital in an individual capacity, while all QFIs can together hold upto 10% in a particular company. These limits shall be over and above the FII and NRI investment ceiling prescribed under the portfolio investment scheme route for foreign investment in India. In future, there are chances that the government may withdraw the capping of investments.
Allowing qualified foreign individuals in equity market will act as catalyst for the Indian equity markets. It will reduce the market volatility to a greater extent, because it will widen the class of investors and deepen the Indian capital market. Earlier, FIIs and DIIs were the major players in India. If these two groups of investor sell the stocks in their portfolio, then those stocks usually crash with high volumes, because there will not be any other person who can support the markets. But with the latest initiative by government authorities, the QFI can lend support to the market to a certain extent, especially when fear controls the markets.
The QFI can play a vital role in the equity markets and currency markets. They can easily develop arbitrage strategies which will suit both equities and currency markets. One of the reasons why the government has given the permission to QFIs is to control the currency volatility. The Indian rupee was around 44 to a dollar in the early month of July 2011. It touched a life time low of 54.32 in early December 2011. After a series of measures taken by RBI and the central government – including allowing QFIs in Indian equity markets – the rupee won back some of its lost sheen.
Allowing QFIs in Indian equity markets may create opportunities for QFIs to carry on trades. Whenever Indian equities offer a decent risk reward ratio, then they can borrow money from other financial institutions and that can be easily deployed in the Indian equity market. A weaker rupee will always offer a good opportunity to QFIs.
After they arrive, the Indian equity markets will become more vibrant – all possibilities to capture arbitrage opportunities will be explored by these groups of individuals who are wealthier than our local investors. They may use the latest software and may even trade through algorithms, which will enable them to make quick bucks. All these activities will make our market vibrant and efficient, and will help provide sufficient liquidity in the Indian financial market.
Algorithm enables them to get direct market access and thereby, they may get the privilege even in smart order placements. QFIs have access to multiple markets. They can diverse their equity risks, and even they can create hedging and arbitrage strategies. The retail investors and HNIs will find it difficult to compete with these set of investors in due course, because these groups have financial muscle power and vast financial market experience.
Decent responses can be expected from QFIs, if the regulators give their final nod to them for listing and trading of SME stocks. We can expect a good appetite on the part of the QFIs for quality stocks in the SME segment in due course. It can give opportunity for the revival of the SME sector as a whole, which are cash-strapped in nature.
Not only the secondary market, but also the IPO and the bond market will get some boosters if QFI investment limits are raised, because one can expect good response from QFIs for quality stocks in India. Of late, the IPO market has been dull and many companies have even postponed their plans to list themselves owing to dampened market condition and lack of investor participation.
Why QFIs over FIIs? FIIs are short term traders in nature. In most cases, they enter and exit markets at a quick pace. Why? They are bound to show some profit in their P&L Account, because the funds which are used by the FIIs mostly belong to various investors. On the other hand, QFIs are individuals and they enjoy the freedom of decision-making and will take all measures possible to make profits in the long term. This move will therefore keep the Indian market more vibrant and less volatile. As it stands today, many individual speculators are also expected to follow the QFI model of investment. It will lower the volatility in the equity markets and this will help our market earn greater respect.
SEBI, the equity market watchdog has taken measures to bring in greater transparency in our financial system. This will definitely appeal to many QFIs. Only issue is: had the government withdrawn the Securities Transaction Tax in this year’s budget then we could have predicted even brighter days ahead for QFI participation in the Indian equity market.