India lifts restrictions on foreign investors

India will allow foreign nationals to invest directly in the country’s listed companies, in a bid to deepen its under-developed capital markets.

“[We] decided to allow qualified foreign investors to directly invest in the Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility,” the finance ministry said in a statement. The move, which also allows pension funds and trusts greater freedom to invest directly, was announced over the holiday weekend and will come into into effect on January 15.

Foreigners were previously restricted to investing in India's equity market through mutual funds or other institutional channels.

But India is under pressure to attract overseas capital after a dismal year for its financial markets, with some economists warning of possible balance of payments difficulties in the months ahead .

Foreign institutional investors have turned bearish on India in recent months, scaling back investments as the country’s growth prospects dimmed and the global economic outlook worsened. The Sensex, India’s benchmark equity index, was one of the world’s worst performing markets in 2011, falling 25 per cent. Foreign investor returns were further hit by the rupee’s 16 per cent fall against the dollar last year.

Overseas funds withdrew a net $380m last year compared to record inflows of $29bn in 2010.

Last month the market capitalisation of all stocks listed on the Bombay Stock Exchange, Asia's fourth largest, fell below $1tn, a level the market first attained in May 2007.

“Such simplification in the procedure can help more inflows into Indian markets, definitely giving a boost to the stagnated current situation," said D.K. Aggarwal, an analyst at Delhi-based SMC Investments.

But other analysts are not convinced the initiative will result in an immediate rush of foreign capital to the flagging emerging market. “We are in an established downtrend. There’s no sign of change,” said Heman Kapadia, chief executive at Chart Pundit, a Mumbai-based investment advisory service.

India’s business leaders have urged the government to prioritise large infrastructure projects, as part of a larger effort to restore the country’s status as one of the world’s most promising investment destinations.

In his New Year address, Manmohan Singh, prime minister, told the nation it could not take India’s high economic growth rate for granted and warned of the need to pare back subsidies and implement tax reform.

“I am concerned about fiscal stability in future because our fiscal deficit has worsened in the past three years,” Mr Singh said.

“We have run out of fiscal space and must once again begin the process of fiscal consolidation.”

The Congress party-led government experienced embarrassing setbacks at the end of the year with failed efforts to introduce retail reform and pass anti-corruption legislation.

Source: FT - By James Lamont in New Delhi

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