Opinion Blocking investments

A lot of effort needs spending to make foreign investments come into India in a year that is plainly going to be a politically volatile

May 13, 2013 01:57 AM IST First published on: May 13, 2013 at 01:57 AM IST

A lot of effort needs spending to make foreign investments come into India in a year that is plainly going to be a politically volatile with or without early elections. More than 42 per cent of the money will be portfolio investments as per the Prime Ministers Economic Advisory Council estimates.

But the Reserve Bank of India (RBI) under Governor D Subbarao is already making enough effort to make this a steep climb,independent of the political shenanigans. The problem is the way the know your customer (KYC) guidelines are being deployed as a shield to block than unleash the flow of money.

Simply put the RBI says foreign investors setting up shop in India to trade in the securities market will have to supply information to even stuff like the passport number of the trader who executes a trade in the dealing room. Young boys and girls literally keep their passport,PAN and a host of other details available on their desk each time they hit the keyboard in the trading room of every investor that carries a foreign institutional investor tag. There are other road blocks too.

As a result a peculiar sub market is developing in India,that of foreign institutional investor (FII) money being re-routed as participatory notes or PN. Of the total stock of say $100 billion of PNs in India,senior bankers aver about 40 per cent is FII money. Remember FIIs are registered for

Indian stock markets because the government sees them as legit money than the world of PNs,where the distinction could get blurred at times. But the cost of know your customer compliance is rising fast enough for FIIs to book investments in shares through banks by setting themselves up as PNs. This sort of trade costs 20 basis points more than that routed through the proprietary books of an FII but the cost of KYC makes up for it.

So the paper trails are doing the reverse of what they should be expected to do. In April,when finance minister P

Chidambaram did the road shows to mop up money for the Indian markets,this was a pressing theme from the investors. Since the dharma of the market regulator,Securities and Exchange Board of India is to promote FII flows,it told the investors at these venues the problems have been sorted out but back home its officials have had to eat those promises.

The rules need to be made easier because the time to make those changes is running out fast in a difficult year. At the retail bank levels those trails simply encourage managers to sidestep them,at the institutional level they cut back on investments.

Subhomoy is a Deputy Editor based in New Delhi.

subhomoy.bhattacharjee@expressindia.com