foreign retail investors India: India cautious on direct play for foreign retail investors

How can foreign individuals currently invest in listed Indian stocks?
Currently, overseas individuals can buy into India’s primary and secondary markets only through the foreign portfolio investor (FPIs) route. They can invest in listed Indian securities through Category II FPIs, which include regulated entities like mutual funds, banks, asset managers, investment trusts, and insurance companies, among others. Category II FPIs are registered with Sebi. Category I FPIs – another bucket as per the regulatory framework – are entities with a higher level of regulatory oversight and lower risk profiles, such as government-related entities, pension funds and sovereign wealth funds among others. Restricting flows through regulated investment vehicles helps the regulator ensure Sebi’s regulations are followed.

Are there any other routes through which investors can invest here?
Foreign individuals can invest in Indian listed equities through indirect routes such as offshore derivative instruments (ODIs) or participatory notes (P-Notes). P-notes are backed by the securities they hold in India and are issued overseas by registered foreign brokers. But this route is frowned upon by the government and the regulator because of a suspected lack of transparency. Abhinav Kumar, Partner – law firm TT&A, said: “Accountability is placed on FPIs to ensure compliance while issuing ODIs and P-Notes; however, due to concerns related to a lack of transparency, this option has become less popular.”

Why are Indian authorities reluctant to allow foreign individuals to directly invest in stocks here?
Indian authorities have remained cautious due to the potential risks of money laundering challenges in conducting thorough Know Your Customer (KYC) checks and a lack of stringent control over foreign individual investors.

What is the status of this proposal?
The proposal is still on the drawing board and needs approval from the finance ministry and the Reserve Bank of India (RBI). In a recent interview with ET, Sebi chairperson Tuhin Kanta Pandey indicated such talks are still at initial stages, “I think that is one which requires a far more sort of engagement in terms of how the requisite KYC will be done and how we take care of that.”

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Do other large markets (like the US, Europe, China, HK, Singapore) allow foreigners to invest directly in their stock markets?
Yes, most of the foreign markets allow foreign retail participation through a local broker. Resident Indian individuals are allowed to invest in equity shares of listed companies overseas within their annual $250,000 limit under the liberalised remittance scheme of RBI. Several domestic brokerages and standalone platforms now facilitate direct investments in the US stock market.

What are the safeguards that the regulators and authorities must consider while allowing foreign individuals to invest directly in Indian stocks?
Lawyers and consultants said allowing individual investors to invest directly should help expand the ownership base of Indian stocks, but this should be allowed only after putting in safeguards. The onus of the KYC obligations must be on the domestic Sebi-registered brokers or brokers. The monitoring of the source of funds and repatriation-related KYC could be done by the custodians with a necessary reporting framework. Suitable investment caps can be introduced to avoid concentration and misuse of the route. “Similar to other non-resident investors, only non-resident individuals from Financial Action Task Force member countries could be permitted to invest, and this set can be even limited to the countries with which India has a bilateral treaty for co-operation,” said Kumar.