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MarketExpress Education Series: Qualified Foreign Investor (QFI)

, October 22, 2013, 0 Comments

Qualified Foreign Investor MarketexpressUnderstanding Qualified Foreign Investors (QFI) and their impact on Indian capital markets

Former Finance Minister turned President of  India, Shri Pranab Mukherjee opened up doors of Indian Capital Markets on Jan 1, 2012 by announcing guidelines for investments by Qualified Foreign Investors (QFI) . The move was aimed to widen Investor class, bring in foreign flows and deepen our capital markets.

Any individual, group or association, resident in a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and resident in a country that is a signatory to IOSCO’s are allowed to enter Indian Capital Markets as QFI. Currently there are around 45 countries from which qualify as QFI Investors for Investments in India.

Why are we excited about QFI?
Earlier Individuals, groups or associations who wish to directly access India, had to go through the FII or Sub Account Route. Both FII  and  Sub Account  Route are considerably more expensive to access India as they involve a fixed start up cost along with permission from SEBI to get started. On the other had QFI route is a self  regulated  route with no special permission required from SEBI with minimal startup costs. QFI Route gives direct access to India to any Individuals or Entities with no account minimums. For eg. an Individual Citizen or a Group even from a far of country like Norway can also directly access Indian Equity and Debt Markets without the need to register with SEBI. This, before the QFI regime,was impossible.

Qualified foreign Investor  Country List MarketExpress

Investment Products available to QFIs
Access to Equity Schemes of Indian Mutual Funds through Electronic Form (Demat Mode)
Access to Debt Schemes of Indian Mutual Funds
Access to Equity Shares listed on Indian Exchanges with full right to all corporate actions like Bonus, Dividend, etc
Access to Equity Shares through Public Issue (IPO)
Access to Corporate Debt Securities listed on the Indian Stock Exchanges
Purchase of Corporate Debt through Public Issue

Investments so far through QFI
The QFI Route is fully operational. So far investment amounting Rs.275.85 Crs has come in to the Debt Market and Rs. 850.56 Crs have come into Equity Market as per latest data from CDSL.

One of the biggest investments has come in through Sanlam, one of South Africa’s largest financial services groups. The investment of around USD 111 million is the largest investment made by a QFI in India, since the easing of QFI regulations for investing in Indian equities over the past few quarters.

How to invest thru the QFI route?
In terms of process flow, first step is to obtain a PAN Card for QFI. After obtaining PAN Card the next step is to open Rupee dominated designated Bank Account. The Final step is to open a demat account and trading account through a Qualified Depositary Participant (QDP)

Key Compliances
Funds transfer to / from the single overseas designated bank account. Maintain investor records and update regulators on any penalty, litigations, etc. Monitor investment restrictions (e.g. only delivery based trades to be done, limits on QFI investments in MF or in a single listed company). A QFI can hold only one DP account at any point of time.

Key Differences FII vs QFI

Qualified foreign Investor  FII QFI MarketExpressTaxation
QFIs do not have to mandatorily file returns in India as the Qualified Depositary Participant (QDP) shall be deducting withholding taxes at the time of Sale or remittance out of India.  The withholding taxes so deducted / withheld would be at the rates as may be notified by the Government from time to time.

India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 79 countries.Depending on the country of residence of the QFI and the clauses in the DTAA, the QFI may be able to get credits for taxes already paid in India. The exact position may vary from country to country and the QFI is advised to check with their tax advisors in their country of residence.

Why is the QFI Route not picking up?
There are number of reasons for subdue response to the QFI Route. One of the main reasons being the requirement of obtaining PAN Card and the need to file Income Tax returns in order to take benefits of withholding tax. Finance ministry& SEBI have been addressing this issue.

As one of the steps in this direction, SEBI recently announced merging of all foreign investors i.e. Existing FIIs, Sub Accounts and Qualified Foreign Investors (QFIs) into a new investor class termed as “Foreign Portfolio Investors (FPIs)”.  KYC norms have also been simplified for FPIs recently. So we feel it’s just a matter of time till the QFI/FPI route picks up. QFI/FPI will be the preferred route to access India leading to more foreign flows for our country.