Two schemes seek to draw foreign insurance and pension funds to India
Two schemes seek to draw foreign insurance and pension funds to India's capital markets and its infrastructure sector.
What is proposed
The government recently unveiled the modalities for two separate schemes that had been announced by Finance Minister Pranab Mukherjee in his 2011 Budget to boost the capital markets and infrastructure financing. According to guidelines issued by the finance ministry, qualified foreign investors, or QFIs, will be allowed to invest up to $10 billion, or Rs 45,000 crore, in India's stock markets through mutual funds under the supervision of the Securities and Exchange Board of India, or SEBI. QFIs that meet Know Your Customer, or KYC, requirements will be allowed to buy units of Indian mutual funds through depository participants. The guidelines for infrastructure debt funds, or IDFs, instruments designed to raise long-term debt for infrastructure, allow creation of two kinds of IDFs: either a mutual fund regulated by SEBI or a finance company regulated by the Reserve Bank of India, or RBI. IDFs set up as mutual funds will issue units to investors, primarily domestic and overseas institutional investors, and invest at least 90 per cent of their assets in debt instruments. IDFs in the form of companies can also target foreign investors by issuing dollar-denominated bonds, and are relatively less risky investments. Both these IDFs will aim to raise long-term money with a maturity of at least five years, but since they will also be tradeable, investors will have the flexibility to exit early.
What will change
At present, offshore investments in the Indian stock markets are restricted to foreign institutional investors, or FIIs, and sub-accounts registered with SEBI and non-resident Indians. The entry of QFIs will broadbase the flow of foreign investment into the Indian stock markets as well as the domestic mutual fund industry. In addition, it is expected to moderate volatility in the capital markets, which at present are dependent on FII funds, considered hot money. "QFIs will give more depth to market and safeguard against volatility," says Thomas Mathew, Joint Secretary in the finance ministry. Strict KYC checks will ensure that dubious investors are kept out. The Planning Commission estimates that India needs about $1 trillion to meet its infrastructure needs over the next five years (2012/17). The private sector is expected to raise about 50 per cent of the money, making it important to look at different ways of bringing in more funds. Banks find it difficult to provide longterm funding because of RBI stipulations on asset-liability ratio and loan exposure limits. IDFs are expected to provide long-term, low-cost debt for infrastructure projects. Fiscal concessions provided by Mukherjee to IDFs in the budget - such as the reduction in withholding tax on interest payments on borrowings from 20 to five per cent - will make it attractive for overseas insurance and pension funds to invest through the NBFC route, which is also less risky. Withholding tax is charged on repatriation of income from equity or debt.
Global experience
China funded its infrastructure by locking in large amounts for the long term, especially from insurance companies. Elsewhere, vibrant bond markets played a key role. India's bond market is shallow. IDFs try to bring together the best of both worlds by locking in long-term money and simultaneously help the evolution of a secondary market for bonds.
The government recently unveiled the modalities for two separate schemes that had been announced by Finance Minister Pranab Mukherjee in his 2011 Budget to boost the capital markets and infrastructure financing. According to guidelines issued by the finance ministry, qualified foreign investors, or QFIs, will be allowed to invest up to $10 billion, or Rs 45,000 crore, in India's stock markets through mutual funds under the supervision of the Securities and Exchange Board of India, or SEBI. QFIs that meet Know Your Customer, or KYC, requirements will be allowed to buy units of Indian mutual funds through depository participants. The guidelines for infrastructure debt funds, or IDFs, instruments designed to raise long-term debt for infrastructure, allow creation of two kinds of IDFs: either a mutual fund regulated by SEBI or a finance company regulated by the Reserve Bank of India, or RBI. IDFs set up as mutual funds will issue units to investors, primarily domestic and overseas institutional investors, and invest at least 90 per cent of their assets in debt instruments. IDFs in the form of companies can also target foreign investors by issuing dollar-denominated bonds, and are relatively less risky investments. Both these IDFs will aim to raise long-term money with a maturity of at least five years, but since they will also be tradeable, investors will have the flexibility to exit early.
What will change
At present, offshore investments in the Indian stock markets are restricted to foreign institutional investors, or FIIs, and sub-accounts registered with SEBI and non-resident Indians. The entry of QFIs will broadbase the flow of foreign investment into the Indian stock markets as well as the domestic mutual fund industry. In addition, it is expected to moderate volatility in the capital markets, which at present are dependent on FII funds, considered hot money. "QFIs will give more depth to market and safeguard against volatility," says Thomas Mathew, Joint Secretary in the finance ministry. Strict KYC checks will ensure that dubious investors are kept out. The Planning Commission estimates that India needs about $1 trillion to meet its infrastructure needs over the next five years (2012/17). The private sector is expected to raise about 50 per cent of the money, making it important to look at different ways of bringing in more funds. Banks find it difficult to provide longterm funding because of RBI stipulations on asset-liability ratio and loan exposure limits. IDFs are expected to provide long-term, low-cost debt for infrastructure projects. Fiscal concessions provided by Mukherjee to IDFs in the budget - such as the reduction in withholding tax on interest payments on borrowings from 20 to five per cent - will make it attractive for overseas insurance and pension funds to invest through the NBFC route, which is also less risky. Withholding tax is charged on repatriation of income from equity or debt.
Global experience
China funded its infrastructure by locking in large amounts for the long term, especially from insurance companies. Elsewhere, vibrant bond markets played a key role. India's bond market is shallow. IDFs try to bring together the best of both worlds by locking in long-term money and simultaneously help the evolution of a secondary market for bonds.
