Foreign Individuals May Get Direct Access to Equity Mkts 

INDIVIDUAL foreign investors should be allowed to buy shares directly in Indian companies, a panel has recommended, opening the possibility of increased portfolio flows into India.
The recommendation is contained in a report that has suggested a more liberal framework for foreign investment in India but strict disclosure rules for investors, two persons familiar with its contents said. The report of the working group headed by UTI AMC chairman U K Sinha was submitted recently to the finance ministry.
It also wants foreign portfolio investment not to be counted for the computation of sectoral foreign investment limits, putting it at odds with the consolidated FDI policy of the government. That policy says that overseas investment of any type portfolio or direct should count in the computation of sectoral foreign investment caps.
The whole idea is to do away with the current norms that distinguish between the same type of capital coming under different garbs. The report suggests doing away with the distinction in private equity, foreign venture capital investors, one of them said.
A recommendation to keep portfolio investment out of the calculation for sectoral caps was also made by the Ashok Lahiri panel in 2004.Mr Sinha was a member of that panel.
Extending the portfolio regime that includes repatriation benefit further would be a progressive step consistent with the liberalisation policy of the government, said Punit Shah, leader of the financial services tax practice at KPMG.
A 16-member working group with Mr Sinha as its head was set up in November 2009 to review the existing policy on foreign portfolio inflows and suggest measures to reduce policy hurdles while ensuring adequate disclosure from investors.
India is seen as a promising investment destination given its strong economic growth at a time when the developed world is struggling. Foreign institutional investors, or FIIs, have already pumped in over $ 11 billion into the Indian stock market since January.
Direct equity market access to foreign individual investors will create demand for domestic brokerages and banks to expand overseas, besides increasing the volumes on stock exchanges.
Vallabh Bhansali, chairman Enam Financials, said allowing individual foreign investors direct access will open up a big opportunity for Indian brokerages to develop relationships with foreign broking firms. But Indian broking firms would take some time and it wont be easy, he cautioned.
Madhabi Puri Buch, MD & CEO of ICICI Securities, said the decision to offer services to overseas investors will have to be taken keeping in mind the regulatory framework in both home and host countries. 
The Sinha panel has, suggested safeguards to ensure it does facilitate money laundering. Individual foreign investors will have to maintain a dedicated bank account for trading, besides a trading account with a depository. They will also have to comply with rigorous disclosure, or know your customer norms, in line with the global standards recommended by the Financial Action Task Force.
This should take care of the allegations of faceless and non-transparent investing that has dogged the participatory notes, or PNs, route used by many foreign entities.
The idea is to simplify the overall investment regime in the stock market for foreign investors so that they come in through the front door and not hide behind structures such as PNs, but the committee has not suggested restrictions on these instruments.
PNs are derivative instruments issued against an underlying Indian security, shares or derivatives.
Foreign portfolio investors registered in India issue these to their overseas clients who do not want to have a permanent presence here. All the benefits of the securities pegged to the PNs to the investor.

THE WAY AHEAD 

UTI AMC chairman UK Sinha-led group suggests a more liberal framework for foreign investment into India 

Panel for imposing rigid disclosure norms on investors 

Says foreign portfolio investment in Indian cos should not be included in sectoral FDI limits 

Says foreign investors will have to maintain a dedicated bank account for trading besides a having trading account with a local depository 

Move will create demand for domestic brokerages and banks to expand overseas besides increasing the volumes on bourses FIIs have pumped in $11 b into the Indian bourses so far this year 

Economic Times, New Delhi, 06-08-2010