The government’s plan to bring in more foreign inflow and shore up the struggling stock markets and sliding rupee has hit an unexpected block.

Investors in America might not be able to access Indian markets through the Qualified Foreign Investor (QFI) route due to regulations that bar selling of financial products not approved by that country’s capital markets regulator, the Securities and Exchange Commission (SEC). Further, any entity that markets such products in the US also requires registration with the SEC.

These conditions could substantially impact the amount of flows targeted to be raised through the QFI route, say intermediaries and market participants. At present, the US accounts for the lion’s share of foreign flows into India through the foreign institutional investor (FII) route.
 

After months of hardsell, including global roadshows that concluded recently, Thomas Mathew, joint secretary (capital markets), in the ministry of finance, said: “This product cannot be marketed in the US. We are taking up the matter with USIBC (US-India Business Council)." He was speaking at a conference on QFIs organised here by the business chamber, Assocham.

USIBC describes itself as the “the premier business advocacy organisation representing America’s top companies investing in India, joined by global Indian companies, with an aim to deepen trade and strengthen commercial ties."

Officials said the government was seeking the help of an industry body because there was no other forum to raise this issue. “We cannot ask to be treated differently from others. Rules will be same for all. There can be some relaxation in the interpretation of these rules. But these cannot be directly suggested by people from outside. That’s why the government is seeking the help of the trade body," said a senior official with an Indian regulator.

According to the QFI frame work, Qualified Depository Participants (QDPs) play a pivotal role in marketing, handling and putting through these investments. Though some 30 entities have registered with the Securities and Exchange Board of India (Sebi), not many are keen to venture into the US. There are some global players such as Citi, Deutsche, HSBC and Standard Chartered, among the QDPs which have operations in both the countries. These players would be able to work out a solution, say experts.

“Any financial product marketed in the United States requires clearance by the SEC. Similarly, any person marketing these product must be registered with the regulator. Getting the Sebi approval is difficult enough. Who will bear the costs and responsibilities of registering in the US and complying with SEC rules?" asked an official with the Indian arm of a US-based fund manager.

According to recently reported figures of Sebi, the Indian stock market has got investments of $200 billion from FIIs based in 54 countries. A little over a quarter of these or $55 bn came from US-based FIIs and sub-accounts. Mauritius, which has a double taxation avoidance treaty with India, also accounts for a little over $56 bn. But, investors from the US are the ultimate beneficiaries of a significant portion of assets formally owned by Mauritius-based FIIs, too.

QDPs also fear that similar rules might hamper flows from other jurisdictions such as Singapore. The ministry’s roadshows have so far concentrated on the Gulf countries and some European destinations. Before the latest revelation about the trouble with Amrican authorities, QDPs had told the finance ministry they estimated an inflow of $80-90 bn in the next two years. While this was an optimistic case, pessimistic estimates put the expected flows at $20-25 bn during this period.