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Foreign investors can now invest in India

January 2, 2012

A bearish market led by doubts over Indias growth prospects has led the finance ministry to take a rather bold step over the weekend. New Delhi announced that individual overseas investors can now put cash directly into Indian stocks. Qualified foreign investors, or QFIs, will now be able to invest individually up to 5 percent of the capital of the Indian company. Cumulatively, QFIs can invest up to 10 percent of the capital of the company being invested in, the government said in a statement.The move is expected to attract more foreign capital into India’s sagging equity markets and reduce market turbulence. The decision will come into effect on January 15, 2012. Previously, only foreign institutional investors and non-resident Indians were allowed to directly invest in local shares, leaving foreign individuals limited to investing in the country’s stock markets indirectly through mutual funds. The government has also eased foreign investment rules in local debt, allowing more foreign capital to flow into its sovereign bonds.

“[We] decided to allow qualified foreign investors to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility,” the ministry said in a statement. India’s benchmark equity index, the Sensex was one of the world’s worst performing markets in 2011, falling 25 per cent, while the rupee dropped 16 per cent. Foreign institutional investors have also turned bearish on India in recent months, scaling back investments as political hurdles, stubborn inflation, series of interest rate hikes, lack of corporate confidence, the rupee’s slide, key reform revered in parliament, and corruption have escalated in the past few months. The optimistic note on which India began 2011, faded fast as the year progressed, leaving FIIs more interested in lucrative Eastern markets.
Overseas funds were net sellers of US$358 million-worth of Indian stocks in 2011, having been net buyers of US$29 billion-worth the previous year, according to market regulator the Securities and Exchange Board of India.
After several years of 8 percent growth, the Indian economy has slowed down. The Ministry of Finance last month trimmed its growth projection for the fiscal year through March to around 7.5 percent, down from an earlier forecast of 9 percent.

Growth in the September quarter slipped to a two-year low of 6.9 percent and industrial production fell 5.1 percent in October, its first contraction since June 2009, inflation hit a high of 9.11 percent, while the rupee slid to a record low against the U.S. dollar at Rs 54 / $.

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