While procedural hassles may have put off investors, market volatility too has played no small a role.

The Government’s efforts to attract capital inflows through the Qualified Foreign Investor (QFI) route have elicited a poor response so far. Since January 1, when they were allowed entry into the Indian equity market, these investors (basically individual foreign nationals) have brought in a mere Rs 37 crore. This pales in comparison to bullish projections of $ 50-60 billion made during the global road-shows that the Finance Ministry had specially organised to sell the scheme. Not only has the deluge of capital expected from this source failed to materialise, but the QFIs’ indifference is also in marked contrast to the Rs 52,000 crore that foreign institutional investors (FII) have already poured into Indian stocks this year.

One reason for the QFIs’ lack of enthusiasm could be the procedural hassles of investing through this route. Though over 30 market intermediaries have registered themselves as qualified depository participants, their actual role in facilitating QFI trades remains unclear. The onus for enforcing the onerous Know Your Client and Foreign Exchange Management Act rules on the QFIs lies with the intermediaries. They are also supposed to deduct tax at source “at applicable rates” on profits or dividends before remitting any sums to their foreign clients. But given that the Revenue Department has not yet even defined who QFIs are or how they should be taxed, there is haziness on this count, unlike in the case of capital gains earned by FIIs, which are specifically exempt from withholding tax. Further, many depository participants registered for QFI trades are brokers and not banks. They, therefore, do not have access to the client’s funds.

While clarifications on the above aspects may help usher in at least the first trickle of QFI investments, it would be unrealistic to expect foreign individuals to take a sanguine view of Indian stocks, as the FIIs are seemingly doing at this juncture. This is more so when Indian markets have earned a reputation for gut-wrenching volatility. The Nifty zoomed by 55 per cent in 2007, only to crash by 52 per cent the next year and then rise by 76 per cent in 2009, and so on. Foreign individuals may find this kind of a roller-coaster ride too risky, especially for a market that over the last five years has delivered an annual return of just four per cent. FIIs can manage such risks by allocating only a portion of their portfolio to the Indian market and actively churning their holdings, apart from hedging their currency risks through derivatives. Retail investors cannot count on the same expertise. Lack of reliable advice on Indian stocks, with most research restricted to the top 150 companies, is an added deterrent here.

The QFI route may elicit strong response only once the Indian economy recovers from its current slump. In the meantime, the Government would do better by focussing on simplifying procedures for QFI investments.

(This article was published on August 29, 2012)
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