The government’s decision on the first day of the New Year to allow individual foreign citizens or qualified foreign investors (QFI), as they have been labelled, to participate in Indian stock markets came as a pleasant surprise on 2012’s first day of trading. The markets even closed positive on Monday after ending in the red on December 30, 2011’s last trading day. The markets had been in a tailspin in 2011, losing 5,054 points in the year, with foreign institutional investors (FIIs) too being net sellers to the tune of $380 million.
The decision to allow QFIs, including pension funds and trusts, to invest upto five per cent of a company’s paid-up capital and an aggregate of 10 per cent will certainly help Indian stock markets in the long term. There may not actually be a rush of QFIs after the guidelines are issued on January 15, but in the long run this will add liquidity and depth to the market — one of the government’s key objectives. Today the markets are at the mercy of FIIs as well as domestic institutional investors. Indian retail investors just aren’t coming in: the reasons are many, but not least is the fact that they burnt their fingers in various scams since the 1990s. They haven’t been able to recover even one paisa of their losses, aggregating to crores of rupees. The new Companies Bill, being delayed by powerful lobbies, could remedy this lacuna in the law and permit class action against companies which fraudulently run away with depositors’ money. This might also worry QFIs: the Satyam scam, for one, is too recent for anyone to forget in a hurry. There is hardly any depth or liquidity in our markets, and it’s easy for those with deep pockets to sway them. Most key individual investors and trusts are long-term players, unlike FIIs with “hot money” who flee at the first sign of trouble — as the markets saw in 2011. To that extent, long-term investment by QFIs might help bridge the huge current account deficit gap and our precarious foreign exchange reserves.
It might take a while longer for QFIs to come in — they will need access to research on Indian companies which cater to individuals. The reports of brokerage houses cater only to their clients. Ironically, the current bear phase that Indian markets are in might prove a disincentive for QFIs. They would find a bull market much easier. Many reports and commentators suggest that Indian markets have not seen the bottom yet; and this would dissuade investors from picking up shares. Ideally, though, this is the right time to pick up shares, particularly with blue chips available at attractive prices.