Buttressed by its forecast of over 7 per cent GDP (Gross Domestic Product) growth in 20181, a rapidly swelling urban middle class2 and market projections that the country will overtake the UK this year to become the fifth largest economy in nominal GDP terms3, international investors and service providers like custodians are relishing the opportunities on offer in India.

    State of the Indian economy

    India is expected to account for 8.6 per cent of the USD6.5 trillion world economic expansion between 2017 and 2019, making it the third biggest contributor to global growth, behind China (35.2 per cent) and the US (17.9 per cent).4 Longer-term, India’s USD2.85 trillion economy5 is likely to supersede the US by 2050, putting it behind China, but well ahead of other major regional emerging market powerhouses such as Indonesia, Vietnam and the Philippines.6

    India’s ascent has been supplemented by a series of expansive and bold market reforms, designed to entice foreign investments that started in 1990s when India opened up its economy to foreign investors. Recent milestone initiatives have included a country-wide consolidation of its tax structure on goods and services; rationalisation of antiquated bankruptcy laws and plans to recapitalise Indian banking industry.

    India’s markets are becoming easier to access for foreign investors, buoyed by the reforms that have been implemented by the government and regulators. This should attract increasing numbers of international investors into the country over the next few years, helping to turn India into one of the world’s leading global markets.

    India’s return potential

    The pool of investment opportunities for foreign institutions inside India is growing while the country has also proven itself to be resilient to the recent turmoil affecting emerging market equities, supported by its macro stability, low policy uncertainty, improving growth and solid domestic flows.7

    As such, a number of experts are forecasting India will be an outperformer in 2018. These bullish predictions are based on the robust record over the last six years of the S&P BSE SENSEX, which has increased from 19,426 in 2012 to 38,251 in 2018.8 Adding to its list of recent accomplishments, India received its first sovereign credit rating upgrade since 2004 by Moody’s. Against this positive, reformist backdrop, experts are confident India will benefit from new flows from foreign institutions in search of returns.9

    India is also working hard to change perceptions that it is a difficult market to enter. Liberalising measures, namely the lifting of constraints on foreigners acquiring equity stakes in companies linked to industries such as defence, construction, airlines and insurance (among others) are accelerating Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) bringing liquidity into the country.

    Furthermore, revisions to FPI rules have provided investors with easier access to the local market, enabling them to transact in listed corporate bonds and equities, government debt, unlisted debt, exchange-traded derivatives and mutual funds, and other financial instruments and asset classes.10

    While inflows suffered a plateau in 2015 and 2016, they have since recovered in 2017 with nearly USD23 billion moving into equities and USD8 billion being allocated towards debt.11

    Access routes for international investors

    Under the market entry provisions, FPIs are partitioned into three categories. Category one comprises of government-linked entities such as Central Banks, sovereign wealth funds or multilateral organisations.12 Banks, asset managers, insurers and pension funds make up Category two, a segment HSBC estimates accounts for 85 per cent of FPI applications to date. Category three is earmarked for charities, foundations, hedge funds, family offices and individuals.13

    Participants with Category one and Category two determinations are subject to lighter KYC (know-your-customer) checks – whereas Category three organisations are considered to be higher risk and face more prescriptive and rigorous KYC. Category three firms are also subjected to higher investment restrictions. FPIs must also meet SEBI’s, the Securities and Exchange Board of India, “fit and proper criteria” and they cannot be based in a country designated as being high risk by the Financial Action Taskforce (FATF).14

    Nonetheless, Indian regulators have made market access fairly simple. Firstly, FPIs do not need register directly with the local regulator but through a Designated Depository Provider (DDP) such as HSBC India. The DDP then provides FPI authorisation on behalf of SEBI, an exercise, which as per regulatory mandate should be completed within 30 days and in practice takes fewer days subject to requisite information being provided. SEBI has further constituted a working group, of which HSBC India is a part, to look into all aspects of FPI framework and suggest reform measures.

    Conclusion

    India’s markets are becoming easier to access for foreign investors, buoyed by the reforms that have been implemented by the government and regulators. This should attract increasing numbers of international investors into the country over the next few years, helping to turn India into one of the world’s leading global markets.

    Disclosure and disclaimer

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