The Government has announced a new scheme under which a foreign individual, a foreign pension fund or even a foreign trust will be able to invest directly in the Indian equity market. These investors will be called ‘Qualified Foreign Investors' (QFIs). The new scheme is expected to be operationalised from January 15.
“This has been done in order to widen the class of investors, attract more foreign funds, reduce market volatility and deepen the Indian capital market,” a Finance Ministry statement said.
The investors are already allowed direct access to Indian mutual fund schemes. The latest decision is the next logical step in the direction, the statement added.
At present, foreign institutional investors (FIIs) or foreigners, through sub-accounts with registered FIIs, can invest in the equity market. Unregistered foreign individuals and institutions invest through participatory notes (PNs). Now, this trend will change.
The new procedure
However, investment is restricted to QFIs from countries that are compliant with the Financial Action Task Force (FATF) recommendations and are signatories to the international body of securities market, IOSCO's, memorandum of understanding.
This condition will allow investors from over 80 countries to access the Indian equity market, save Pakistan and some other countries.
The QFIs will have a separate ceiling from FIIs and non-resident Indians (NRIs). A QFI can hold up to 5 per cent of paid-up equity of a company and all QFIs put together cannot hold more than 10 per cent in a company.
All QFIs will first need to open a demat account with any depository participants (DPs), as sale and purchase of equity will be allowed only through such an account. Also, one QFI will be permitted to open only one account.
This new category of investors will also have to fulfil the ‘Know Your Customer' (KYC) norms prescribed by the regulators.
The Central Board of Direct Taxes (CBDT) will issue a separate form for Permanent Account Number and KYC, especially for the QFIs. The depository participant can facilitate the QFIs to fulfil all these statutory requirements.
Tax treatment
Regarding tax treatment, a Finance Ministry official clarified that a separate notification would be required to be issued by the Income-Tax Department. However, this is likely to be the same as for domestic investors. However, QFIs from a country that has a double taxation avoidance agreement (DTAA) with India may get benefits like any other FII.
On August 9, 2011, the Government had allowed QFIs to invest directly in domestic mutual fund schemes.
These investors can now invest up to $10 billion in equity schemes, while for debt mutual fund schemes, there will be an additional limit of $3 billion. There will be no limit for one investor or one scheme.