by Moiz Mannan
In what is being viewed as a short term measure to attract foreign capital and a long term measure towards full convertibility of the Indian rupee, the Reserve Bank of India (RBI) last week conditionally allowed non-resident investors, including NRIs, to buy shares of Indian entities listed on recognised stock exchanges under FDI scheme.
Experts have opined that in the coming weeks, the Indian stock markets are likely to be in turmoil, but over the next few months, the indications are positive. Financial services entity Nomura, for example, has forecast that the Bombay Stock Exchange’s Sexsex will touch 21,700 by the end of this year.
The stock of many fundamentally good performers are trading at levels lower than they ought to and this makes them lucrative buys for foreign investors, including non-resident Indians (NRIs).
Currently, only Foreign Institutional Investors (FIIs), non-resident Indians and Qualified Foreign Investors (QFIs) are allowed to acquire shares of an Indian company listed on a recognised stock exchange.
The apex bank, RBI, has now liberalised the foreign direct investment (FDI) policy to allow non-residents, including NRIs, to acquire shares of listed companies on recognised stock exchanges through a registered broker, provided the non-resident investor has already acquired, and continues to hold control, in accordance with the Securities and Exchange Board of India’s (SEBI) Takeover Code.
As per the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, ‘control’ includes the right to appoint a majority of the directors, or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their share holdings, management rights, shareholders’ agreements or voting agreements, or in any other manner.
A director or officer of a target company shall not be considered to be in control of such target company merely because of holding such a position.
The amount of consideration for transfer of shares can be paid by way of inward remittances, debit to Non-Resident External/Foreign Currency Non-Resident bank account, debit to non-interest bearing INR Escrow bank account or out of dividend payable by the Indian investee company, provided the right to receive dividend is established, and the dividend amount has been credited to a specially designated non-interest bearing rupee account for acquisition of shares on the recognised stock exchange.
The pricing for subsequent transfer of shares to non-resident shareholders shall be in accordance with the pricing guidelines under FEMA, the RBI said in its notification of September 6.
The move has strengthened the view that India is looking to clear the way for foreigners to be treated on a par with FIIs, as they can buy shares in the company they control (in line with the SEBI takeover code regulations) through on-market deals. Earlier, they were allowed to do so only through off-market deals.
Experts feel that capital flows to Indian markets will increase significantly because stock market acquisitions are now allowed to be funded through dividends paid to NRIs.
It is also felt that India has signalled a further movement towards full convertibility of the rupee. In the current dispensation, repatriation of capital is restricted to a particular class of investors in select assets. With this latest notification, the RBI is being seen as having allowed that facility to even foreign individuals (non-resident investors) and NRIs.
Simultaneously, the central bank has further eased Foreign Direct Investment (FDI) norms and allowed banks to provide guarantees on behalf of NRIs to acquire shares and debentures in Indian companies. Such transactions should be compliant with provisions of the Securities and Exchange Board of India, it added.
Besides, the guarantee provided by a bank should be covered by a counter-guarantee of a bank of international repute and should also be valid during the tenure of the offer period, the RBI said.
Meanwhile, a strong indication of foreign investors’ appetite for value stocks in India came when earlier this week, the RBI lifted the restrictions on foreign institutional investors (FIIs) buying shares of Infrastructure Development Finance Company Ltd (IDFC).
The shares of the company shot up by 7.42 per cent on the BSE and 7.58 per cent on the NSE following the announcement.