Foreign Investors Now Allowed to Invest Directly in Indian Stock Market

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Jan. 5 – India has permitted overseas individual investors, pension funds, and trusts to directly invest in equities, in an effort to shore up investor confidence and attract money from overseas to bridge the widening current account deficit.

Procedures that enhance capital inflows are high on the government’s agenda as the international downturn led by the Euro Zone Crisis has led to investors pulling money out of Indian equities. For India, the problem has been compounded by a bend in investor confidence because of policy inaction leading to a sharp fall in new projects.

India’s finance ministry said in a statement on Sunday that the measures were intended to widen the investor class, draw in more overseas resources, reduce market volatility, and deepen the Indian capital market. The statement explained the new group of investors as qualified foreign investors, or QFIs.

The BSE Sensex shed close to 25 percent in 2011, making it the worst-performing major equity market in 2011. Record inflows – US$29 billion in 2010 – turned into outflows as foreign investors sold shares.

Foreign institutional investors pulled out money on the basis of growth falling below 7 percent and widely-publicized difficulties in obtaining regulatory clearances.

The government is eager to reverse these trends as the current account deficit – a key macroeconomic measure – is close to 3 percent, above the 1-1.5 percent levels the government has been comfortable with. Making it easier for wealthy investors to buy Indian equities could be one way of bridging the gap, market participants have said. Such inflows are under the capital account.

According to the finance ministry, there were a significant number of investors in Europe keen to invest directly. In spite of the current hiccups, India is seen as a long-term promising investment destination given its strong economic growth at a time during which the developed world is struggling. While growth slipped below 7 percent in the last quarter, most of the world’s major economies are growing below 2 percent.

Foreign institutional investors are separated on their predictions on the direction of the Sensex for this year.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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