Easier regulations, clamp down on offshore derivative instruments, and Indian equities outperforming other markets in the last few years have boosted foreign investors interest in the country, leading to a spurt in the number of foreign portfolio investors (FPI) this year.
Over 600 new FPIs registered with Securities and Exchange Board of India (Sebi) in 2018 — the steepest rise in FPI count since 2014, when the market regulator overhauled rules for offshore investors and introduced the FPI regime. There are now 9,246 FPIs active in the country.
“FPIs continue to show interest in Indian markets, especially from a long-term perspective, though I feel investments were impacted due to global factors and tightening of the debt investment route to some extent,” said Rajesh Gandhi, partner at Deloitte India.
Experts said a series of regulatory easing has helped improve offshore funds sentiment about the Indian markets in recent times. Sebi has reduced compliance burden, introduced single application form for FPI registration, and eased broad-basing norms, among other measures. Several other relaxations are also in the pipeline as Sebi-appointed H R Khan Committee on FPIs is working with the industry to make the regime even simpler. Other regulators, including the Reserve Bank of India (RBI) and Central Board of Direct Taxes (CBDT), have also liberalised some FPI norms.
“The regulatory environment around FPIs has improved significantly over the last few years and there are no major challenges currently pertaining to regulations,” said Sandeep Parekh, founder of Mumbai-based Finsec Law Advisors. “However, incremental changes such as further simplifying tax registration process could be considered by the regulators to improve the ease of doing business,” he said. Apart of the new FPI registrations is also on account of increasing direct participation of offshore funds in the Indian markets. Earlier, FPIs with smaller exposure to India preferred investing through indirect routes such as participatory notes (p-notes).
However, regulatory tightening around p-notes has forced several funds to seek direct registration with Sebi. The year had its share of fallouts between offshore funds and Indian regulators. In April, Sebi came out with a circular imposing restrictions on non-resident Indians (NRIs) using the FPI route to invest.
The move attracted widespread criticism among FPIs, forcing Sebi to reverse its stance. Similarly, an RBI circular released in April imposed certain restrictions on FPIs subscribing to non-convertible debentures (NCDs), which brought the private placement deals to a standstill.
“FPIs have faced several issues during the year,” said Tejesh Chitlangi, partner at law firm IC Universal Legal. “However, the macro environment for FPIs has been conducive as the regulators have been proactive in resolving any genuine concerns of offshore investors,” he said.
“India would continue to attract new foreign investors on the back of simpler regulations and attractive market returns,” Chitlangi said.
Experts said there is scope for improvement in FPI regulations, especially in rationalising the cost for setting up shop in India. On an average, it costs an FPI $12,000-15,000 to set up funds and start investing in India. In comparison, the cost of setting shop in emerging market (EM) peers such as South Korea, China and Brazil is significantly lesser.
“Improving operational efficiency is a key demand of FPIs from Indian regulators as cost for setting up a fund in India can be brought down further,” said Viraj Kulkarni, founder of Pivot Management Consulting, a custodian consulting firm for FPIs. “Additionally, FPIs also want consistency in regulatory actions where there arent too many changes to the regulations in short period of time.”
The cost aspect assumes significance since a lot of regulatory changes that have happened in the last two years, including renegotiation of tax treaties with Mauritius and introduction of general anti-avoidance rules (GAAR), have made India less cost efficient.
Gandhi of Deloitte said FPIs had initially struggled with the additional KYC requirements introduced last year. “Subsequent clarifications and relaxations on KYC and NRI investments were welcomed by FPIs,” he said.