Removing hurdles for FII: Are all issues sorted out?

Market regulator Securities and Exchange Board of India (Sebi) has adopted the KM Chandrasekhar committee report on ways to simplify foreign portfolio investment regime.

However, the final report omitted quite a few suggestions on foreign institutional investor (FII) flexibility and taxation, reports CNBC-TV18’s Sajeet Manghat and Payaswini Upadhyay. Also read: Sebi clears new buyback norms, clubs FIIs, QFIs as FPI Finance Minister P Chidambaram had set the ball rolling in his budget speech, and the mandate of picking out ways to ease the entry routes for various foreign portfolio investors (FPIs) into India was given to a committee headed by former Cabinet Secretary KM Chandrasekhar. However, the panel's original report, submitted to Sebi on the 12th of June, was converted into a draft report and the panel was asked to modify it. This modified report, which the Sebi board adopted at its June 25th meeting, had significant changes. One, the draft report called for a 34 percent automatic cap for a new category of investor called FPIs that's an amalgam of the 24 percent automatic cap for FIIs, and the 10 percent cap for qualified foreign investors (QFIs). But the final report sets this FPI cap at just 24 percent or as per the discretion of companies in keeping with the sectoral cap in effect. Hence many think this makes for a narrower investment window. Siddharth Shah, Partner, Khaitan & Co says, Perceptionally it is a reduced flexibility, so I think it is really how it is going to be positioned and in my view I don't think it’s not going to have any significant negative impact.” The other big change was that the original report dwelt in detail on the changes required to the IT Act to ensure smooth transition from FII to FPI regime. But the final report has none of these recommendations and puts the onus of making any necessary changes to the IT Act on the finance ministry. However, experts argue that this could lead to a lot of confusion and legal tangles. “The Operationalisation of this regime should not be done till there is a very clear provisions regarding tax. Because today whether we like it or not, the tax environment in India has created the biggest uncertainty for the investors. Therefore any piece meal approach to a regulatory development like this excluding the necessary tax changes will send out a strong negative message to the world,” says Siddharth Shah. The argument is that any such negative message will negate the motive behind the entire exercise of attracting more foreign investment into the Indian financial markets. Sebi and the Finance Ministry have now accepted recommendations to expand the jurisdiction for QFIs from the current 48, to 168 jurisdictions. This means QFIs, especially those coming via Mauritius, will be welcome as long as the investor does not fall under the 'high-risk and non-cooperative jurisdictions' list. Therefore, till the legal issues are sorted out, the new environment may not really work in bringing in that elusive foreign investment.