The move comes following a year of poor performance from India’s benchmark Sensex index, which lost a quarter of its value in 2011 and led a similar loss from the MSCI Asia (ex Japan) index.
A statement from the finance ministry on 1 January said Qualified Foreign Investors (QFIs) would be able to directly invest in Indian stocks "in order to widen the class of investors, attract more foreign funds and reduce market volatility".
In the Budget announcement of 2011-12 QFIs were permitted direct access to Indian Mutual Funds and the ministry said direct equity access was the next logical step in the development of its market.
The statement continued: "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."
Yet the Sensex has recorded its second worst annual performance ever, something analysts have attributed to continued high inflation, a lower growth rate and struggling currency (last year the rupee fell 16% on the dollar).
Despite this Edward Bland, head of investment research at Duncan Lawrie, is supportive of the long-term investment case in India: "We are keen on emerging markets, especially India. The effect on India from the continuing crisis in the eurozone is likely to be less pronounced than on other Asian economies, including China, as the Indian economy is less dependent on exports than its neighbours. Currently I see India as a contrarian buying opportunity for investors."
The key to the country’s long-term potential stems from a growing population with a burgeoning young workforce, Bland said. By 2025, the country is expected to have more people than China.
QFIs will include individuals, groups or associations resident in a foreign country compliant with the Financial Action Task Force and which is a signatory to the International Organisation of Securities Commissions.
The individual and aggregate investment limits for QFIs will be 5% and 10% of the paid up capital of an Indian company respectively.
A Qualified Depository Participant (DP) will be required for a QFI to open a ‘demat’ account (or electronic trading account) and the QFI should buy and sell stocks through that DP only.
The new scheme is expected to be in operation by 15 January.
