Why is India currently an attractive market for overseas investors?
Indeed, India continues to be an attractive market for foreign investors. During the pandemic, we did virtual roadshows where a number of institutional investors like asset managers, banks, hedge funds and financial sponsors accessing India products participated and shared their views. The sentiment amongst the participants about India continues to be very encouraging and India continues to improve its appeal as one of the preferred investment destinations. I would say these interactions reinforce my view that India, on the back of a high growth rate, stable macro-economic parameters, policy reforms, and demographics among others, remains an attractive investment destination for foreign investors and will continue to be so for times to come. The cross-border inflows year on year is a massive vote of confidence for the Indian economy and reflects on our attractiveness as a prominent investment destination for global funds.
What opportunities do you see in the Indian securities services industry?
Our domestic fund management industry is showing significant growth in line with the Indian economic growth and consequent rise in income and wealth levels. As a country with one of the highest saving rates, there is a visible shift in asset allocation away from traditional investment avenues like gold, property, bank deposits towards financial assets. The predictions are that the mutual fund industry asset under management and investor base will grow 4-5 times over the next decade. As mentioned earlier, the interest from FPIs continues to remain high as evidenced by the flows and number of registrations. This presents a material opportunity for the securities services industry as a whole including us.
Further, Indian markets and the securities services industry is seeing some rapid advancement in the newer technologies and the way we use technology. Data and digital solutions are being tested across the breadth of securities services – be it clearing and settlement or corporate actions or foreign exchange services. HSBC is one of the pioneers in adopting new technologies and is working on cutting edge D&D solutions including DLT based platforms, robotics, tokenization etc. with FMIs, regulators and Fintechs in many markets with the aim of driving efficiency, performance and faster client responses. Combining the two, the Indian market will provide us with a phenomenal opportunity for deploying newer fintech solutions and also help us in taking these domestic innovations elsewhere in the globe.
What are your clients focusing on, heading into the second wave of Covid-19 pandemic?
As far as markets and foreign institutional investors are concerned, the operations have been going on smoothly and we have not seen a sustained outflow given the pandemic. So, while there have been some months of net outflows, overall, there has been a healthy net inflow from foreign investors since the pandemic started. We believe this is owing to India’s attractiveness as an investment destination and we are likely to continue to be a net recipient of global investment fund flows for years to come.
Sebi has eased FPI rules for trading on IFSC at GIFT City. How was the response to IFSC so far? What are the challenges your clients are facing in IFSC?
The regulators have taken a number of measures to attract foreign investors to the IFSC, GIFT City including the introduction of an Eligible Foreign Investor (EFIs) framework under which investors are free to trade on the stock exchanges at the IFSC without FPI like registration process. Further, SEBI has also relaxed KYC norms for the registered FPIs that wish to trade at the IFSC. Members of the stock exchange at the IFSC are allowed to rely upon the KYC due diligence carried out by SEBI registered intermediaries during registration and account opening. Thus, FPIs are not required to undergo KYC due diligence again if they wish to trade at GIFT City. Further, the regulators have also provided the enabling framework for foreign investors to launch funds at IFSC that can register and invest as FPIs in NSE/BSE at Mumbai, thus providing an alternative to foreign investors to route their funds.
IFSC is an emerging concept for India and while we are already seeing a lot of momentum with many banks, including HSBC, and securities firms setting up operations there and trading volumes at IFSC stock exchanges growing multi-fold within a relatively short period, it may take some time for the entire financial ecosystem to get established.
The government and the regulators have been quite supportive of business at the IFSC and have put together an enabling framework in line with the needs of the market participants. The general feedback from investors trying to access the IFSC is quite positive and as such we have not heard of any major bottlenecks being faced by them. That said, one of the reasons we may not be seeing enough foreign investors participation at GIFT City is due to the relatively lower trading volumes. Authorities are working to encourage more participation. We hope to see greater trading volumes at the IFSC once NSE-Singapore Stock Exchange connect goes live and it should be able to attract more foreign investors.
What are the major challenges foreign investors are facing in India currently and how can they overcome these?
Allow me to answer this differently. The government and regulators have done a commendable job of progressive reforms by putting together one of the most conducive regulatory frameworks as compared to any other major emerging economies. That said, reforms are a journey and our cross-border investment framework needs to keep evolving. The global passive fund management industry has been growing at a fast rate and to attract a fair share of that capital, we must take steps that facilitate India’s inclusion/weight increase in the global equity and bond indices. Few areas to look at will be further simplification of the access process, KYC norms and easing of caps and restrictions on foreign portfolio investors (FPIs’) investments, to ensure that the process becomes more efficient and less intensive on compliance with the various requirements. Further, as the overlap between investors using the FPI and foreign direct investment (FDI) routes increases, it may make sense to have a unified foreign investment framework that simplifies and harmonises the frameworks and reduces operational and compliance costs for the market and investors.
Which recent regulatory developments are having the most effect on the space?
If I were to highlight a few recent developments that have helped in this space, those will be the simplification of the FPI registration and KYC processes based on the HR Khan Committee recommendations. The decision to do away with the broad-based criteria and to liberalize the cap for aggregate FPIs investment in Indian companies and bring it at par with sectoral limits have been major reforms in the framework that helped India’s standing in global equities indices and consequently helped India attract additional foreign investments. Similarly, on the debt side, the introduction of Voluntary Retention Route (VRR) and Fully Accessible Route (FAR) for FPIs investing into government securities have been noteworthy developments that simplified the investment process and restrictions.
At an operational level too, our regulators are conscious of the challenges faced by the market participants and have been forthcoming with the measures to address the situation. To mention a few, SEBI’s measures like allowing custodians to process FPI registrations based on scanned documents were very well received and greatly helped to grant new FPI registrations. RBI also took considerate steps to relax the government securities trading and reporting timelines that helped FPIs and market participants.