In the current global environment, where capital is scarce and there are countries competing for attracting the same capital, it is important for every nation to become an investor-friendly destination. The first step toward this objective is to do away with multiple procedures, rules, regulations, red tape et cetera and bring more transparency and clarity in policies.
India as an Investment Hub: Strengths and Challenges
Factors that make India an attractive, investor friendly destination include the government’s policies on the liberalization of most sectors for foreign investment, growing opportunities across sectors, skilled human resource, cost-effective production facilities and strong domestic demand.
The enabling environment to bring new people into the financial system is very strong in India but there are a host of regulatory challenges that prevent investment/ doing business in India.
The biggest challenge that most investors/companies face is the Indian governance framework, which is intertwined between the Central and State structures. Any sort of investment has to face several complex bureaucratic procedures and comply with both state & central rules and regulations. Moreover, duties and levies undergo frequent revisions during the Annual Central and State budget exercise. These factors are the major reasons why many foreign companies/ investors indicate ‘dealing with regulations and procedures’ as one of the major challenges.
Over 200 foreign portfolio investors (FPIs), who have exposure to India’s financial markets, say that the cost of trading is high compared to other emerging markets, in a latest PwC India report. A significant majority of the FPIs also view India’s current regulatory and tax environment still challenging, compared to other markets. There have been issues on retrospective taxation in the past, which have negatively impacted the image of the country as an investment destination.
The following are the greatest challenges that hinder investment in India:
- A reactionary approach to legislation
- Unpredictable bureaucracy and volatility in laws
- Corporate laws and Foreign Exchange Controls
- Lack of Transparency
- Tax Ambiguity
Despite initiating various schemes to ease regulatory policies, India still does not seem to be a uniform market. Each of its 29 states has its own rules on land purchase, employment, tax and the environment. State-level reforms supersede national law creating ambiguity & complexities for Investors in the nation.
Government Initiatives to ease Regulatory Barriers:
India has already marked its presence as one of the fastest growing economies of the world. It has been ranked among the top 10 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly. The GoI has run some important initiatives like Make in India, Smart Cities, Digital India, PMJDY etc to mobilize funds/investment in the nation. Some key government reforms to increase investment prospects are highlighted below:
- Easing of FDI limits in several high value added sectors such as telecom, retail, defense, construction and railways
- Reforms in the labor market, including a single window labor compliance process for industries, more user-friendly provident fund facilities, and a new inspection scheme
- Encouragement to advanced manufacturing by The Department of Industrial Policy and Promotion (DIPP) to deregulating a large number of products such as defense items, from the purview of industrial licensing
- Push for import substitution by encouraging local manufacturing of up to 181 imported products
- Creation of an Investor Facilitation Cell in ‘Invest India’ to guide, assist and handhold investors during the entire life-cycle of the business
- Replacement of multiple indirect form of taxes by GST Regime
- New bankruptcy law, providing for simple and time-bound insolvency process
Recommended Steps to Enhance Investment
- Increasing equity exposure of pension fund to expedite regulatory clearance: Currently, the pension funds under PFRDA are allowed to invest up to 15% of the corpus into stock market. The Pension Fund Regulatory and Development Authority of India (PFRDA) has sought approval of finance ministry to raise the limit of government employees’ pension funds in the stock market up to 50%. The same is awaiting the clearance of Finance ministry.
The authority manages about Rs 1.70 trillion of funds belonging to 1.5 crore subscribers who come from government and non-government sectors. Of this 85% are government subscribers
- Increasing equity exposure of Provident Fund: EPFO started investing in stocks in August 2015. In 2015-16, it invested 5% of the annual incremental corpus in equities and in 2016-17, 10% which was further increased to 15% in FY 2017-18. EPFO has an annual incremental corpus of more than Rs1.2 trillion and 15% of that will be at least Rs18,000 crore. Suggest this limit to be further enhanced to 50% as proposed for pension fund. The EPFO is not picking valuable stocks itself for the retirement fund corpus. Rather, it is relying on the broader market. The investment of EPFO in the stock market is through the Sensex and Nifty ETF. Suggest to allow EPFO to directly invest in the equity shares.
- Introduction of innovative products: In May 5, 2016, the National Stock Exchange (NSE) launched weekly Bank Nifty options contracts. This gave market participants the flexibility to hedge their portfolio or trade at a lower premium. Earlier, the exchange’s Bank Nifty futures and options contracts had a monthly expiry. Weekly options contracts would provide traders another option to play with lesser premium and lesser investment compared to monthly options contracts. Suggest extending this to other Nifty products like NIFTY IT, NIFTYMIDCAP, NIFTY INFRASTRUCTURE etc.
- Making Demat account compulsory for residents: The number of Demat accounts in India is a paltry two per cent of the total population and has not grown at a healthy pace over the years. SEBI needs to simplify the KYC procedure so that opening a Demat account becomes easier for a common man for e.g. AADHAR linked Demat accounts. Further, common Demat account for holding financial assets would be very useful for investors. Depositories to work towards offering single Demat account which will hold all financial assets including fixed deposits.
- Suggested changes in SEBI ICDR Regulations: To enhance retail participation in the equity markets, SEBI may consider the following:
Making retail discount mandatory to encourage retail participation
Insurance company related to the BRLM be allowed to participate in the Anchor Book
Increase the limit of mandatory allocation to retail investors from 35% to 50% especially in PSU-IPO
Varsha Purandare, MD & CEO, SBI Capital Markets Ltd, writes this piece for FICCI’s CAPAM 2017 Knowledge Paper.