FPIs, NRIs, And Own Goals In The Name Of ‘Black Money’
India is putting the cart before the horse by stifling the offshore market while the onshore markets are not yet ready.
Indian nationals living abroad breathed a sigh of relief last week when India’s securities regulator SEBI announced that it would roll back most of its recently issued and unconsulted regulations, preventing non-resident Indians from holding senior positions or acting as investment managers for funds investing in India. Public outcry from the investor community made it clear that this would place $75 billion of foreign investment in the Indian markets at risk and helped prompt the regulator to overturn this decision. One might ask why a government and regulator would prevent its own nationals who are familiar with the market from helping international investors to invest there for the benefit of its citizens.
In India, the rationale is centered around the seemingly eternal hunt for ‘black money’ and the fear of ‘round-tripping’. In a previous attempt to eradicate un-taxed wealth, in a surprise move, India declared 86 percent of its currency void in 2016. This demonetisation move had questionable results. Critics say that it slowed down the economy and led to job losses in some sectors, while doing little to ‘catch the bad guys’. While focussing on ‘black money’ and going after those that avoid tax is a legitimate pursuit, and one certainly supported by the average person on the street, there are better ways to do it.
In these clunky attempts to deal with ‘black money’, India is essentially scoring an own goal, by preventing legitimate investors from putting their money to work in the Indian market to grow the economy, and just encouraging those Indians who have their money offshore illegally to invest elsewhere.
An Allergy To ‘Offshore’
An offence occurs in India when the funds are illegally transferred offshore – and this is instead the point that regulators should focus on. New Delhi would be better advised to target its efforts on preventing the new flow of ‘black money’ from going out, while focussing on more effective monitoring and surveillance to ensure that those who have their money offshore are detected in a timely manner, and enforcement takes place appropriately, as is done elsewhere in the world.
The new OECD common reporting standard would be a good place to start and is designed for this very purpose.
Earlier this year, MSCI – one of the largest global providers of indexes that are being tracked by funds worth billions – put India on its watchlist, citing limitations to investor access including a lengthy registration process for foreign investors, as well as the decision by the three Indian exchanges to restrict the use of their data in derivatives products in offshore exchanges.
Over recent years, the volumes of trading in Nifty futures on the Singapore Exchange have ballooned. In an attempt to bring liquidity back onshore, in a sudden and collective move, the Indian exchanges restricted data sharing with offshore exchanges, including SGX. This was in addition to a clampdown and increasing restrictions imposed on participatory notes.
In effect, India is putting the cart before the horse by stifling the offshore market while the onshore markets are not yet ready to welcome foreign investors.
Step Up To Compete
Although India has taken some steps to facilitate the ease of doing business for foreign investors such as the recently issued common form, and efforts from the recently set up HR Khan Committee that is looking into FPI regulations, more needs to be done. The registration process is still lengthy, and foreign investors are subject to numerous and ever-changing investment limits that are difficult to monitor.
India is pushing for Gujarat International Finance-Tec City to be India’s rival to Singapore and Dubai for derivatives. A brainchild of Prime Minister Modi in his home-state of Gujarat, GIFT City is India’s first international financial hub. However, despite many efforts and tax incentives, it has yet to gain traction with most foreign investors who are concerned that GIFT City – although promising – is currently not ready to cope with the substantial flows that are invested through SGX via its Nifty 50 contracts.
To invest in/through GIFT City, the offshore investment community will need to incur setup costs in terms of developments and infrastructure.
Clarity on GIFT City and long-term commitment to the project are key, certainly in an election year.
These issues are all in stark contrast to India’s biggest competitor China which has been bending over backwards to lure in foreign capital by smoothing foreign access through multiple access channels in its equity and debt markets including Stock Connect and Bond Connect.
Reflecting China’s ongoing progress towards market reforms and increased access for foreign investors, and after three years of saying “no”, global index provider FTSE Russell announced this week that it will include Chinese stocks in the FTSE Emerging Index and the FTSE Global All Cap Index.
At the same time, MSCI said it was considering increasing China’s weighting in the MSCI Emerging Markets Index which will lead to billions of dollars in both passive and active foreign investment into China. India is a promising market with a compelling growth story, but it will need to considerably step up its game if it wants to attract – and keep – foreign investors. This is especially true in the current context of pressure on emerging markets, increasing U.S. interest rates, soaring oil prices and booming U.S. markets. In line with Modi’s mantra, India should “reform, perform and transform” rather than put up barriers to legitimate foreign investment that will bring the needed capital to allow that to happen. And which won’t catch the crooks.
Mark Austen is the chief executive officer of the Asia Securities Industry & Financial Markets Association.
The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.