The Finance Ministry has just concluded a road show in the Gulf countries to attract qualified foreign investors (QFIs). Geojit BNP Paribas and Deutsche Bank were the organisers of the week-long tour that covered Dubai, Bahrain, Kuwait, Muscat and Riyadh. According to Mr C.J. George, Managing Director, Geojit, who was with the Indian team all through, the response from the Gulf investors to the QFI scheme has been overwhelming. In an interview to Business Line , Mr George said he expected diversion of some Gulf-based investments from the troubled Euro Zone to India.
How was the response of Gulf investors? Does India’s economic outlook worry them?
Although India has been going through macroeconomic difficulties, there was no anxiety about it among investors anywhere in the Middle East. On the other hand, I got the feeling that the investors are looking for a geography which is relatively calm compared to Europe and the US. Many of them are concerned about the current confusing state of affairs in the Western economies and want to explore India aggressively as a new investment destination. I won’t be surprised if some of them switch investments to India to manage risks arising out of the current turmoil in the West. Another reason why India is dear to them is the proximity to India and Indians. For many, their family investments are managed by Indians and they are comfortable investing in India, using the knowledge and expertise of their own managers.
Standard & Poor’s has recently said India’s rating outlook is at risk of a downgrade. Did this issue come up during the road shows?
Yes, the issue was raised in all the road shows. At least in informal conversations, one surprising signal I received was that the rating agencies have lost a lot of credibility unlike before. Hence, instead of rating concerns, there were very serious references to specific macroeconomic indicators like high inflation, rupee depreciation, etc. which will have a bearing on their investment decisions.
Do you expect a large flow of QFI funds to Indian markets?
I am of the view that there will be significant flows from the Middle East, especially at a time when they are thinking of downsizing their investments in Western economies. However, there will be a definite attitude of wait-and-watch before big dollars flow in. What I can say without doubt is that there is genuine interest from Middle East investors to invest in India. Regulators and intermediaries will have to take extreme care with regard to practices and processes, as any discord will create long-term damage to the flow of funds from a cash-rich region.
There have been reports about the issue of freedom for easy entry and exit to investors. How big a concern is that?
Of course, overseas investors have been concerned about lack of freedom in entry and exit; however, the current rules and regulations have made life easy for them. The NRI investment managers/advisors seem to have more apprehensions than the investors themselves.
What about taxation, particularly GAAR?
There were concerns raised about taxation issues as well as the proposed GAAR, which the delegation was able to clarify. As the gains arising from long-term investment in stocks (held for more than one year) are tax-free, there were no grave concerns since the investment timeline is likely to be for more than one year, at least when they start. These investors seem to be comfortable paying 15 per cent tax on profits if they made profits from short-term investments. The concerns, I think, are more on the safety of the investment rather than the tax. The regulators and policy makers will have to ensure that these investors are not cheated by intermediaries and companies themselves. In other words, trust is more important than taxation.
What about tax on short-term capital gains?
For the calculation of tax liability for short-term capital gains, these investors must be permitted to adjust short-term losses against short-term profits, which, while being a legitimate expectation, is not very clear at the moment. We require clarification on this point from the tax authorities before we start taking investments. I think, probably, it would have been better if there was a phased approach, so that the entry of these investors could have been restricted to large companies above a certain size including IPOs.
Are KYC norms for QFIs an issue?
The QFI know-your-customer process is still not hassle-free even after the recent amendments, as the attestations for KYC are permitted to be done by the branches of Indian stock-broking companies in these countries. Many of the Gulf countries do not permit 100 per cent investment in this sector which will enable Indian broking companies to open branches. There has to be an amendment to this, to include either JVs of Indian broking companies or employees of Indian broking companies to carry out the attestations.
What do you see as major concerns of Gulf investors?
The first and foremost concern has been whether the investors will be taken for a ride by unscrupulous advisers, brokers or companies. Investors are more comfortable dealing with local offices or people of well-known broking companies or banks at least for the initial period. There will be a cautious approach with regard to new investment ideas/approaches in the beginning.
In fact, some large investors even suggested investing only in the top 100 stocks as they don’t want to take the risk of investing in smaller companies without a proven track record. The Gulf-based investors will also be selective with regard to the business of the companies in which they invest. Some are likely to bring in conditions like Sharia-compliant business which is understandable. Investors look for personalised and high-quality service and this is what the QDPs (qualified depository participants) and brokers will have to take care in the beginning.
Are private equity funds bullish?
There were lot of enquiries from private equity funds for investments in Indian companies which is outside the purview of QFI window. In fact, a Minister from Bahrain, who is also the Chairman of Economic Development Board suggested the establishment of a permanent platform to showcase Indian projects to local investors who apparently are searching for opportunities to invest. The obvious reference was to the opportunity to interact with regulators and Government officials along with the representatives of companies who want to raise capital. Being new investors, the region will look for a lot of comfort from the Government. I got a feeling that there can be big investment flows, if we can deliver Sharia-compliant opportunities in private equity space. Indian infrastructure can benefit immensely by attracting these investors.