India lifts restrictions to allow international investment

In an announcement, India's Finance Ministry said that allowing qualified foreign investors (QFIs) to directly invest in the country's equity market would help increase market depth and combat volatility, as well as widening the class of potential investors in Indian companies.

International investors were previously only able to invest in the country's equity market through mutual funds or other institutional channels. The change will come into effect on 15 January 2012.

QFIs include individuals, groups or associations resident in a foreign country which complies with certain international finance agreements. These include the inter-governmental Financial Action Task Force (FATF) and international securities regulator IOSCO.

Foreign investors will be able to buy and sell equities in any freely convertible currency through a Qualified Depository Participant registered with the Securities and Exchange Board of India (SEBI). Individual investors will be limited to 5% of the total paid-up capital of the Indian company, subject to an aggregate foreign investment limit of 10%.

The registered depository participant will be responsible for ensuring the QFI meets regulatory requirements, as well as deducting applicable taxes before paying any dividends.

Construction law expert Sachin Kerur of Pinsent Masons, the law firm behind Out-Law.com, said that the move was an important one as previous investment restrictions had acted as a bar to India's international trade.

"India is still a relatively emerging market, so there is potentially the question of whether market volatility will result from investors putting money in then withdrawing it at the first sign of difficulty. However, given the appetite among Indian companies to access the capital markets to fulfil their domestic and international aspirations, allowing a wider class of potential investors gives them a much greater opportunity to drive their growth ambitions," he said.

Indian Prime Minister Dr Manmohan Singh identified economic security as one of the country's priorities for 2012 in his New Year Address to the Nation. The Indian economy has grown by 8% each year on average since 2004, however Dr Singh said it would be "wrong to conclude that India is now unshakeably set on a process of rapid growth".