The Finance Minister Pranab Mukherjee in his Budget 2012 speech announced that asset management companies of Indian mutual funds will be allowed to take investment directly from foreign investors in equity mutual fund schemes. Hitherto, only foreign institutional investors (FIIs) and NRIs registered with market regulator Securities and Exchange Board of India (Sebi) could buy units of India-managed funds.
Mukherjee also raised FII limit for investment in corporate bonds to enhance the flow of funds to the infrastructure sector with residual maturity of over 5 years from the present $20 billion to $25 billion. And this took the total limit available to FIIs for investment aggregated to $40 billion.
Though Indian MFs are eager to open doors to foreign investors, whether they will come in big numbers will depend on factors like KYC (know your customers) norms, tax aspects, investment limits and so on.
Sebi guidelines soon
First of all, Sebi will have to formalise a detail guideline which according to its Executive Director K N Vaidyanathan will be shortly announced.
What’s more? Top officials from Sebi have already met key officials of foreign sponsored and domestic fund houses to discuss the ways to attract foreign investors in Indian equity mutual funds. “The broad discussion was on how those foreign institutional clients who are not keen to register with Sebi as FIIs, be allowed to invest in equity schemes,” says an official.
While the policy is awaited, all MFs agree that Mukherjee’s move is positive as it opens up a world of opportunities for Indian AMCs and could fetch new sources of assets in the long term.
HDFC Asset Management’s MD Milind Barve said, “It is a good starting point and is a key thing that we are going out to get foreign investors to put money in Indian mutual funds.” Concurs Quantum Mutual Fund Director Ajit Dayal, saying: “It is a positive step in the sense that it shows a change of mentality in the government’s policy; it is a proof that India wishes to open its capital markets a little more.”
Echoing the same sentiment, Reliance Mutual Fund CEO Sandeep Sikka said, “This is an opportunity which will bring in a lot of foreign money into the country” and adds that
“Once the rules are set, fund houses will start expanding the overseas distribution channels.”
That is easier said than done, said SBI Funds Management MD Deepak Chatterjee: “Indian fund houses will have to work very hard to establish their credentials and position themselves as fund houses which have a very good track record.”
Is India attractive?
Quantum’s Dayal feels that in the short term, the move may not benefit much because to accept foreign investment, Indian MFs will still need approvals from the home country of the foreign individual.
For instance, he says, if a US individual investor wants to buy units in Quantum Long Term Equity Fund, the latter may not be able to take their money because it is not registered with the SEC (Securities and Exchange Commission) in USA and as such, is not an approved fund in the US. “AMCs in India now need to move to the next step of making it possible for the money flow to reach us,” Dayal says.
And for those flows to reach here, Dayal continues: “The Government of India needs to tell the US and other foreign governments that we will allow their insurance companies to increase their equity stake in Indian ventures; or allow foreign companies to sell us equipment for nuclear plants etc, only if the US and other foreign governments allow India-approved, Sebi-approved mutual funds to be freely sold in the US.”
Others feel that investors abroad already have some access to instruments to invest in India. Value Research (tracking mutual funds) CEO Dhirendra Kumar said, “If you live in any country with a reasonably sophisticated financial industry, then you already have access to funds that invest in India.” From the perspective of a potential investor interested in Indian equities, nothing much changes.
It is also felt that India and other emerging markets are not priority investments options for most people elsewhere in the world as no end-users’ portfolio is made up of a majority of Indian stocks. At best, Kumar said, “India is a garnish on top of equities from the major western markets. This won’t change in the foreseeable future.”
Set the ball rolling
Select foreign fund houses like Franklin Templeton and Fidelity, to mention a few, already in India, and having huge presence across globally stand to gain first as foreign investors may prefer to invest in a fund house they know well, says Aditya Birla Money head (Investment Advisory & Financial Planning) Joseph Thomas.
Next to gain, according to Thomas, will be big fund houses like UTI Mutual Fund, Reliance MF, HDFC MF, Birla Sun Life and ICICI Prudential MF, who account for over half of the industry’s assets under management.
“We expect funds with foreign parentage to possibly gain more as distribution would be a key in this case. One issue that needs to be resolved is practicality of complying with the KYC norms,” ING Investment Mgmt India CIO K Ramanathan says.
KYC check a big hurdle?
Fund houses think the move to liberalise portfolio management route will smoothen things as doing a due diligence check for foreign retail investors is a big hurdle. “If the KYC can be accepted from a local jurisdiction, it will be a big boost,” said one industry expert.
“We need to see the extent of KYC required and whether the investor will need to have a PAN number for income tax needs. Once that is done, each fund will have to get the approval from the jurisdictions where they have to be sold,” says Kotak Mutual Fund CEO Sandesh Kirkire.
Income tax is another aspect that requires clarity. “The success of the move will also depend on tax aspects, investment limits (if any) and such other important details,” says BNP Paribas Asset’s MD Nikhil Johri.
Given the challenges, smaller AMCs will surely face difficulty in marketing their products to investors abroad and servicing foreign investors. They also face competition from a number of India-dedicated mutual funds already available in foreign countries.
Long-term view
One hopes that foreign investors keen to invest in India believe in the country’s long term growth story and not cave in to redemptions at the slightest sign of market volatility. Since foreign funds investing in Indian equities have behaved like short term speculators, they have not struck the right chord till now in influencing Indian stock markets. Their actions have caused a lot of volatility in stocks, swinging between bull runs and sudden crashes. FIIs, many a times are not bothered by the strong fundamentals of Indian economy. Investors in mutual funds may also behave in a similar fashion.
However, Dayal offers a solution saying: “We need to recognise that - irrespective of the colour of skin, or the passport they carry - there are short term investors in every country .... So the debate is not “foreign” v “Indian”; it is long term v short term.”
So any investment held for more than 3 years should be classified as long term and be made tax free - irrespective of where the money flows in from, says Dayal. Short-term gains (less than 3 years) should be taxed at different slabs of 10 or 20 or 30 per cent.
This differential tax treatment will ensure that long-term money comes into the stock market and short-term money stays out whether foreign money or Indian money, Dayal said.
New class of investors
Many feel that investment option in MFs will bring in a new class of investors who are sensitive to cost and returns. As long as these are ensured, they stay invested.
Not wanting to hazard, a guess on quantifiable fund flow possibly from the segment, Thomas said, “It is only a fresh and new avenue of funds for Indian AMCs but, let’s face it, it won’t be huge a amount.” Dayal feels that the move will yield some result only if we redefine focus from ‘foreign or Indian’ investors to ‘long term or short-term’ investors, and use tax rates to make that differentiation on holding periods.