Qualified Foreign Investors (QFIS) Allowed to Directly Invest in Indian Equity Market; Scheme to Help Increase the Depth of the Indian Market and in Combating Volatility Beside Increasing Foreign Inflows into the County

In a major policy decision, the Central Government has decided to allow Qualified Foreign Investors (QFIs) to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market. QFIs have been already permitted to have direct access to Indian Mutual Funds schemes pursuant to the Budget announcement 2011-12. Today’s decision is a next logical step in the direction.

Foreign Capital inflows to India have significantly grown in importance over the years. These flows have been influenced by strong domestic fundamentals and buoyant yields reflecting robust corporate sector performance.

In the present arrangement relating to foreign portfolio investments, only FIIs/sub-accounts and NRIs are allowed to directly invest in Indian equity market. In this arrangement, a large number of Qualified Foreign Investors (QFIs), in particular, a large set of diversified individual foreign nationals who are desirous of investing in Indian equity market do not have direct access to Indian equity market. In the absence of availability of direct route, many QFIs find difficulties in investing in Indian equity market.

As a first step in this direction, QFIs have been permitted direct access to Indian Mutual Funds schemes pursuant to the Budget announcement 2011-12. As a next logical step, it has now been decided to allow QFIs to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market.

The QFIs shall include individuals, groups or associations, resident in a foreign country which is compliant with FATF and that is a signatory to IOSCO’s multilateral MoU. QFIs do not include FII/sub-accounts.

Salient Features of the Scheme:

· RBI would grant general permission to QFIs for investment under Portfolio Investment Scheme (PIS) route similar to FIIs.

· The individual and aggregate investment limit for QFIs shall be 5% and 10% respectively of the paid up capital of Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India.

· QFIs shall be allowed to invest through SEBI registered Qualified Depository Participant (DP). A QFI shall open only one demat account and a trading account with any of the qualified DP. The QFI shall make purchase and sale of equities through that DP only.

· DP shall ensure that QFIs meet all KYC and other regulatory requirements, as per the relevant regulations issued by SEBI from time to time. QFIs shall remit money through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category - I bank. Upon receipt of instructions from QFI, DP shall carry out the transactions (purchase/sale of equity).

· DP shall be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.

· Risk management, margins and taxation on such trades by QFIs may be on lines similar to the facility available to the other investors.

The scheme is expected to help increase the depth of the Indian market and in combating volatility beside increasing foreign inflows into the county.

SEBI and RBI are expected to issue relevant circulars to operationalise the scheme by January 15, 2012.(as per SEBI GUIDELINE)

Stock lending coming to life ( Financial Express)

While India has a world class equities trading ecosystem, one of the last missing building blocks is a mechanism to borrow shares. Stock lending is important because it will improve the pricing of stock futures, and because it will enable expression of bearish views about non-derivatives stocks. A stock lending mechanism has been under development for a decade. In 2010, there seems to finally be some traction in this. If this works out, then one of the last missing pieces of the equity ecosystem would fall into place.

Divergent views of an array of participants are the essence of finance. If a person feels optimistic about a stock, he can borrow money and buy shares. What about the pessimist? When a share price is Rs.100, a pessimist borrows shares and sells them on the market. He is obliged to return the shares at a later date. If the pessimist is right, the share price goes down to (say) Rs.90. He then buys the shares back at Rs.90 and returns them, for a profit of Rs.10.

The ability to borrow shares is thus essential to a free and fair market: Just as optimists can borrow money, pessimists should be able to borrow shares. While this is the right way to think about thousands of listed firms in India, there is a privileged group of 200 firms who are different. They have stock futures trading. India is unusual by world standards in having achieved success with stock futures at NSE. Stock futures are cash settled, thus giving true symmetry between the optimist (who would buy the stock futures) and the pessimist (who would sell the stock futures).

While stock lending is not important for a healthy and balanced speculative price discovery to come about for these 200 stocks, there is still a vital role for it, in the process of stock futures arbitrage. Derivatives pricing is done by arbitrage. The futures price should reflect an interest cost of carry over the spot price. If the futures price on the market is too high, then arbitrageurs step in, who buy an equal quantity of shares on the spot market and sell the futures. They make a profit while taking no risk, and perform the socially beneficial function of pushing prices back to sanity.

But what happens if the futures price is too low? The arbitrage strategy then requires buying the futures (where the price is too cheap), and simultaneously selling an equal quantity of shares on the spot market. But what if the person doing this arbitrage does not own those shares? He needs to be able to borrow them. Hence, a stock lending mechanism fosters pricing efficiency for the stock futures, by connecting shares (in the portfolios of lenders) with the arbitrageur. Indeed, without a stock lending mechanism, a sharp decline in the stock futures price is hard to correct.

In the international experience, stock lending is done on a bilateral basis. The borrower and lender meet each other and undertake the lending. This leads to trouble when the borrower defaults, in which case the lender stands to lose his shares. In India, a unique path was chosen by SEBI: that of requiring a counterparty guarantee of the clearing corporation, and of having a transparent screen-based system for borrowing.

For many years, this did not work out. There have been times when the present author has despaired of making this work and recommended that we drop down to bilateral mechanisms, as is done in the West. In 2009 and 2010, finally, it appears that the problems are being resolved. SEBI revised its rules about the stock lending mechanism. In June, NSE's clearing corporation (NSCC) implemented a screen based matching platform and a full counterparty guarantee, reflecting these new rules.

In recent weeks, this has started exhibiting some traction. Over 10 weeks, lending worth Rs.300 crore has taken place, with an average of Rs.5.5 crore a day. A total lending fee of Rs.64 lakh was paid. While these numbers are puny, they are a lot better than zero. They suggest that basic design mistakes are absent. With further debugging, there is a potential for fairly big numbers to rapidly come about. Every investor who has shares sleeping in a depository account now has an opportunity to make a little revenue by lending out these shares.

At present, there are two key constraints. First, institutional investors are absent on the lending side. For any investor, earning a little additional revenue by stock lending is a free lunch, since NSCC guarantees the return of shares thus eliminating credit risk. The constraints which hold back mutual funds, FIIs, banks and insurance companies from lending shares need to be removed.

Secondly, for firms lacking stock futures trading, stock lending is of critical importance in enabling the expression of negative views. Absent stock lending, stock prices have a positive bias since optimists can take positions while pessimists cannot. Hence, the scope of stock lending needs to be broadened beyond the derivatives list.

SEBI Changes in 2012.........

A. As  a New Year gift to the Companies that are not meeting the Minimum Public Holding requirement, SEBI has at its Board Meeting held on 3rd January 2012 decided to introduce the following additional methods, for the purpose of compliance with the provisions of SCRR with regard to the Minimum Public Shareholding to be maintained in any listed company:


1. Institutional Placement Programme (IPP); and


2. Offer for sale of shares through stock exchanges


Both the above mentioned methods have certain salient features/ pre prequisites and need to be followed in compliance therewith. Under both the options, caps have been specified, in terms of the Issue Size, limits of dilution, categories of allottees/ transferees, procedure for allotment etc.


The highlights of IPP Method are as follows:


Public shareholding can be increased by 10% or such lesser percentage as is required to comply with the minimum public shareholding requirement.
Shares can be sold only to qualified institutional buyers, with a reservation of minimum 25% to mutual funds and insurance companies.
Issuer shall announce an indicative floor price or price band atleast one day prior to the opening of the offer.
The aggregate demand schedule shall be displayed by stock exchanges.
There shall be atleast 10 allottees in every IPP issuance. No single investor shall receive allotment for more than 25% of the offer size.
The allotment of shares may be made on price priority, proportionate or on pre- specified criteria which has to be disclosed in advance in the prospectus and cannot be changed subsequently.


The highlights of Offer of shares through stock exchanges are as follows:


A separate window shall be offered by the Stock Exchange.
The offer shall be for atleast 1% of the paid-up capital of the company, subject to minimum of Rs. 25 crores.
Only the promoter/ promoter group of companies which are active /eligible for trading would be permitted to offer their shares for sale.
Every bid/buy order would be required to be backed by 100% upfront cash margin. The settlement shall be through exchange clearing mechanism.
Allotment would be done either on price priority or clearing price basis proportionately and would be overseen by the exchanges.


Further, it has also been decided that Offer for sale through the stock exchanges method can, apart from being used for compliance with minimum shareholding requirements, also be used by the promoters of top 100 Companies (based on average market capitalization) for sale of their stake.


To recapitulate, SEBI had vide its Circular dated 16th December 2010, mandated that for the purpose of compliance of Cl 40 A of Listing Agreement, listed companies could have resorted to either issuance of shares to public through prospectus or offer for sale of shares held by promoters to public through prospectus or sale of shares held by promoters through the secondary market, with the prior approval of the Specified Stock Exchange, within the timelines specified by Ministry of Finance.


This move for allowing the above 2 additional methods shall prove Industry friendly in meeting with the Minimum Public Shareholding requirements in case of listed companies.


B. Further, SEBI has also decided to make the following amendments in the SEBI Buyback Regulations:


Procedure for acceptance of shares in buy back through tender offer: The company shall announce ratio of buyback as is done in the case of rights issues and fix a record date for determination of entitlements as per shareholding on record date. While the shareholders will be free to tender over and above their entitlement, acceptance of shares shall first be based on entitlement of each shareholder and if any shares are still left to be bought back, acceptance of additional shares tendered over and above the entitlement shall be in proportion to the excess shares tendered by the shareholder.
“Record Date” in lieu of Specified Date.
Review of requirement of issuing Public Notice and Public Announcement: The Public Announcement shall be published within two working days from the date of Board or Shareholders resolution, as the case may be.
Rationalisation of timelines in buyback through tender offer: It has been decided to revise the time lines for various activities involved in the buyback process.


SEBI has also issued a Circular bearing no. CIR/IMD/FIIC/1/2012 dated 3rd January 2012, with respect to the investment limits of FIIs in Government debts and Corporate debts, whereby it has withdrawn the facility of re-investment and now re-investment period shall not be allowed for all new allocations of debt limit to FIIs/sub-accounts.

With global market turmoil & weak rupee! Will Gold shine in 2012?

Gold's spectacular sprint has been cut short by a speed bump in the past few weeks. From an all-time high of over $1,900 an ounce (Rs35,332 per 10 gm at $1: Rs52.72) in September, the price of the precious metal fell to under $1,590 an ounce (Rs29,520 per 10 gm) in mid-December. The question worrying investors now is whether this obstacle will lead gold prices to trip and fall, or will they touch even higher peaks?

There is no doubt that 2011 was the golden year; gold prices rose by 32.6%, while the Sensex fell by 25.2% (see graphic). Even silver performed better by delivering 11.4% returns. But will these metals continue to outshine in the new year? Experts are divided about how gold will move in 2012. While some believe that the prices will cross $2,000 an ounce, others argue that these will move in the opposite direction and may drop to as low as $1,450.

Kunal Shah, head, commodity research, Nirmal Bang, is among the latter. "There are two major reasons why gold will lose its sheen. One, the US economic reports have been encouraging in the previous quarter, so the dollar is likely to strengthen. Two, inflation is expected to moderate. I see gold trading at $1,300-1,400 an ounce in the coming year. Any major rally from here will be a good opportunity to book profits." 


The global economic turmoil may be a stimulant as well as a dampener for gold prices. While the metal is seen as a hedge against inflation, in the current scenario, there is fear that deflation may be more likely. In fact, despite the recent warning by rating agency Fitch that it may downgrade France and six other Eurozone countries, gold prices remained lacklustre.

The opposing school of thought believes that as the factors that pushed gold prices this year-Eurozone debt crisis, negative real interest rates, inflation and debasement of fiat currencies-will continue to have a strong impact in 2012, the prices will move even higher. 


Major international banks have predicted that gold prices will rise by 13-28% (above $1,595 an ounce), which means that they will range from $1,810-2,050 an ounce. According to Goldman Sachs, central banks may buy 400-600 tonnes of gold in 2012, which could push up the price of gold. 


Other analysts are also bullish on gold. Says Renisha Chainani, manager, commodities research, with Edelweiss Comtrade: "There is more than a 50% chance that gold prices will touch the $2,000 mark in the second half of 2012. However, it will not be a one-way rally and volatility may be high, so the price could range from $1,500-2,000 next year." She advises investors to allocate no more than 10% of their portfolio to gold. 


Though prices may fluctuate in the international market, the variance in India may be low because of depressed demand between 16 December and 14 January. The demand will pick up when the wedding season starts and gold is bought irrespective of the price. Another reason is that though prices may decline globally, the weakening rupee will keep them high in India. Says Thomas J Muthoot, MD, Muthoot Finance: "The global gold prices have slid almost 7% in the past month, but the falling rupee has contained the fall to 2.5% in India."

Source:Economic Times.