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FM Opens Doors For Foreign Investors In Equity MFs

By Pallavi S

  • 28 Feb 2011

The much awaited policy norms related to foreign direct investment (FDI) in retail sector did not find its place in the Union Budget 2011-12 but the finance minister did surprise the markets positively by further opening the foreign investors tap for domestic equity mutual funds.

This could be seen as the government’s response to boost foreign investment in the country. While capital market gurus would hail it as yet another route to bring more money into the stock market, for critics, this is a move to plug the slowing FDI or long term investment flow with more of foreign institutional investors(FII) or ‘hot money’.

Currently, only FIIs and sub-accounts registered with the market regulator SEBI besides non resident Indians are allowed to invest in mutual fund schemes. “To liberalise the portfolio investment route, it has been decided to permit SEBI registered mutual funds to accept subscriptions from foreign investors who meet the know-your-customer requirements for equity schemes. This would enable Indian mutual funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market,” the finance minister Pranab Mukherjee said in his annual budget speech.

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The government is further keen to enhance the flow of FII money in the infrastructure sector. It has raised the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, by an additional limit of $20 billion taking the limit to $25 billion. This will raise the total limit available to the FIIs for investment in corporate bonds to $40 billion.

“Since most of the infrastructure companies are organised in the form of special purpose vehicles, FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs will be allowed to trade amongst themselves during the lock-in period,” according to the finance minister.

In the meantime, the government has also sought to assuage concerns of lack of reforms with lengthening list of pending policy changes with some positive talk without spelling out specific moves.

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“To make the FDI policy more user-friendly, all prior regulations and guidelines have been consolidated into one comprehensive document, which is reviewed every six months. The last review has been released in September 2010. This has been done with the specific intent of enhancing clarity and predictability of our FDI policy to foreign investors. Discussions are underway to further liberalise the FDI policy,” the minister said on Monday.

The minister also said he proposes to move financial sector legislations such as The Insurance Laws (Amendment) Bill, 2008; The Life Insurance Corporation (Amendment) Bill, 2009; The revised Pension Fund Regulatory and Development Authority Bill, first introduced in 2005; Banking Laws Amendment Bill, 2011; Bill on Factoring and Assignment of Receivables; The State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2009 and Bill to amend RDBFI Act 1993 and SARFAESI Act 2002.

These would lead to significant changes in the financial sector as these policy changes among other measures, hiking foreign investment limit in the insurance sector from 26% to 49%. However more than government’s interest in seeing through these pending reforms, these would be dependent on clearing political roadblocks to such changes.

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New Announcements In BFSI Space

Meanwhile, the minister said the much awaited easing of norms related to the country’s top monetary authority the Reserve Bank of India giving some additional banking licences to private sector players is likely to see changes soon as he proposes to bring suitable legislative amendments in this session of parliament. “RBI is planning to issue the guidelines for banking licences before the close of this financial year,” he said.

Microfinance, that has been in the midst of controversy and a policy logjam in few particular regions, also found a mention in the Union Budget, though not affecting the business of existing microfinance institutions directly.

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The government proposes to create within a year an India Microfinance Equity Fund of Rs 100 crore with the state-sponsored SIDBI besides Women’s SHG’s Development Fund with a corpus of Rs 500 crore to empower women and promote their self help groups.

The minister said the RBI committee looking into issues relating to microfinance sector in the country has submitted its report and the government is considering putting in place appropriate framework to protect the interests of small borrowers.

Another set of policy changes affects the housing finance sector. The government has eased the existing scheme of interest subvention of 1% on housing loans by extending it to housing loan upto Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh from the present limit of Rs 10 lakh loan for house costing upto Rs 20 lakh.

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It has also enhanced the ceiling on housing loan that is categorised under priority sector lending from Rs 20 lakh to Rs 25 lakh to factor in the changing dynamics of Indian property market as realty prices have moved up in urban areas. Both these moves will benefit housing finance firms through higher demand for affordable housing segment.

The minister also said following the announcement made a year ago, the government has set up a Financial Sector Legislative Reforms Commission under the chairmanship of Justice B N Srikrishna. This group will rewrite and streamline the financial sector laws, rules and regulations and bring them in harmony with the requirements of a modern financial sector. “The Commission will complete its work in 24 months,” the finance minister said.

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