Lack of clarity on existing investor categories, laws targeting tax evaders put off investors
Five-and-a-half months into 2013, the Indian market hasn’t been able to add even one additional foreign investor. SEBI data show that the number of registered FIIs at 1,759, the same as on December 31, 2012.
Even the additions to ‘Sub Account’ category of investors (those who ride piggyback on a registered investor’s account) are lower at 46 this year compared with 59, the same time last year. Also, these numbers are nowhere near the growth posted in 2011 which saw 824 new investors coming on board. Even the new category of non-institutional investors created recently —‘qualified financial investor’ — has not elicited much enthusiasm either, if the measly quantum of monies mobilised is anything to go by (Rs 74 crore till now).
The Finance Ministry’s efforts to attract new foreign investors into India are clearly not proving too effective.
Why the slowdown?
So, what are the reasons behind the lacklustre numbers? The Government’s proposal to merge the existing categories of foreign investors into one — Foreign Portfolio Investors — could be one. Who could blame foreign investors for wanting to put off their entry until the new rules are announced?
The threat of the taxman going after foreign investors coming in through off-shore tax havens through the General Anti-Avoidance Rules (proposed in the 2012 Budget) couldn’t have helped either. Though the implementation of these rules has been postponed, the proposal has not yet been completely discarded.
A third factor may also be at work. Foreign investors are seeking more lucrative markets closer to home countries. The exuberance in the US and Japanese equity has also made funds move into these markets in 2013. According to EPFR Global, a global fund flow tracker, “Retail investors bought into America’s modest but steady recovery and the hope ‘Abenomics’ will jumpstart Japan’s economy.”
That said, the foreign investors already in India continue to pump in more money. These investors have already invested close to $15 billion into Indian equity so far this year.
This behaviour is puzzling many. “Indian equity markets are an enigma,” says Manishi Raychaudhuri of BNP Paribas in a recent report.
“Despite a ghastly macro, the equity market continues to attract record inflows. One reason is the lack of choice in the rest of Asia. Another is , despite a significant macro-economic slowdown, India still offers investors a bouquet of good quality stocks generating good earnings growth, cash flows and ROEs and with decent corporate governance practices. We are not surprised that 80 per cent of FII flows have gone to 20-25 stocks,” the report said.