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Cutting red tape 'essential' to attract new investors to India

Allowing QFIs to invest directly into Indian equity markets is a long-term positive step for the country, but removing complicated bureaucratic measures will be central to draw foreign investors into its markets

Analysts say allowing qualified foreign investors (QFIs) to directly invest in the Indian equity market has to be at the top of the Indian government's agenda, and should be as accessible and seamless as possible to allow the new process to work and open up more channels of investment.


“Why would you invest in India if the Indian procedure is difficult and you could get the same investment opportunities from other emerging markets?" says Suresh Mahadevan, head of India equities, UBS Securities in India. "There is a tendency to make things complicated in India and this has to change. Making things simple is the key factor for success for this scheme.”

At the beginning of this year, India revealed that the government gave the greenlight on allowing QFIs to directly invest in the Indian equity market, where previously foreign individuals were limited to investing in the country's stock markets indirectly through mutual funds and other institutional channels.

But while the complicated processes in India has come under scrutiny, the pace of change of India’s economic landscape is also sluggish.

Yet market participants have remarked that, by introducing new channels of investment, this is part of a 20-year liberalization procedure.

“India takes an incremental approach to policy implementation," says Ajay Bagga, head of private wealth management at Deutsche Bank in India. "There has been measured liberalization of the economy since 1994 and the introduction of QFIs is part of the whole process.” 

Other experts say that, despite the somewhat lengthy periods of change, the key point is that regulations do eventually change and develop for the better.

“In India, it takes a long time for things to change, but the good news is it does change," says Ramit Bhasin, head of markets at RBS in India. "The demographics, vibrant economy and a corporate sector that is starting to compete on a global basis is too big to ignore.”

Introducing a new investment route aims to stimulate a lagging economy, as economic growth prospects in the emerging market slowed during the last year.

India’s equity index, the Sensex, was one of the world’s worst-performing emerging markets in 2011. It dropped nearly 25% in that period due to high inflation, high interest rates, a depreciating local currency and slowing domestic growth.

And cautious investors will continue to govern Indian market performance.

“If QFIs had been introduced this time two years ago, when Indian markets had given 63% upside in 2009, investors would be flocking to the country but, unfortunately, this is not the case now,” says Bagga. "We will need to see a change in market sentiment for better capital inflows into India."

India is in need of a positive, local catalyst to boost investment into India. And change may be just around the corner. "Reducing inflation and Central Bank easing rates will hopefully kick start a more positive investor sentiment,” says Mahadevan.

But for now, investors will have to wait and see how they will be accommodated. Guidelines for QFIs are scheduled to be announced on January 15.

“Only then will we be able to judge how easily new foreign investment will flow into India,” says Bagga.

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