Question

Rationalize the numerator in QFI to obtain QFII

Answer 1

QFI

The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to those from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).

QFI scheme was introduced by Government of India in consultation with RBI and SEBI in the year 2011, through a Union Budget announcement.

The objective of enabling QFIs is to deepen and infuse more foreign funds in the Indian capital market and to reduce market volatility as individuals are considered to be long term investors, as compared to institutional investors.

QFIs are allowed to make investments in the following instruments by opening a demat account in any of the SEBI approved Qualified Depository Participant (QDP):

• Equity and Debt schemes of Indian mutual funds,
• Equity shares listed on recognized stock exchanges,
• Equity shares offered through public offers
• Corporate bonds listed/to be listed on recognized stock exchanges
• G-Securities, T-Bills and Commercial Papers

QFIs do not include FIIs/Sub-accounts/ Foreign Venture Capital Investor (FVCI).

Need and context for allowing QFIs

Uptill 2011, foreign investors, including foreign nationals, institutions, funds and other entities, invested into India:

• Either as FII/ sub-account of an FII
• Or, by buying into an offshore exchange-listed fund (ETF)-which has a back to back cover into an FII /sub-account
• Or, through instruments such as Participatory Notes issued by FII against an Indian security-stock or Index.
• Or by investing in Depository receipts issued by Indian companies such as ADR /GDR

Since the direct investment route was not available for individuals or anybody other than an FII, many foreign retail investors including High Networth Individuals (HNIs), foreign endowment funds, pension funds, etc. who were desirous of investing in India used to find it difficult and therefore get discouraged to invest in India.

In the wake of low global interest rates and weak economic recovery in the western economies in the post-financial crisis period beginning 2008-09, emerging market economies like India were poised to receive more foreign capital flows. Considering this opportune time, QFI scheme was designed so as to attract a large set of diversified individual investors from low-risk regimes, in the form of Qualified Foreign Investors (QFIs), by allowing them to have direct access to the Indian equity market.

Benefits of QFI Scheme

QFIs access to the equity market is expected to broad base the market while enhancing the capital flows into India. More importantly, since QFIs are the diversified set of heterogeneous investors, QFIs participation is expected to help dampen the volatility in the Indian equity market that arises due to sudden inflows or off-loading done by FIIs. The direct participation route offered through the QFI scheme was expected to reduce the transaction cost and complexity hitherto persisting due to a large number of intermediaries. It would also bring in better transparency while reducing the need for using participatory notes route. QFIs access to the Equity market is also expected to help harnessing the investment potential remaining untapped in various sectors.

Present Status of QFIs

QFIs, have now been merged in to Foreign Portfolio Investors (FPI), when the FPI regulations were introduced in 2014.

The existing QFIs may continue to buy, sell or deal in securities for a period of one year from the date of commencement of FPI Regulations i.e. till January 06, 2015 or until it obtains a certificate of registration as FPI, whichever is earlier.

QFII

Qualified Foreign Institutional Investor (QFII) is a program that allows specified licensed international investors to participate in mainland China's stock exchanges. The Qualified Foreign Institutional Investor program was introduced by the People's Republic of China in 2002 to provide foreign institutional investors with the right to trade on stock exchanges in Shanghai and Shenzhen. Before the launch of the QFII program, investors from other nations were not allowed to buy or sell stocks on Chinese exchanges due to the country’s tight capital controls.

Understanding QFII

The Qualified Foreign Institutional Investor program quota was set at $80 billion in April 2012, a decade after the program launched. As of April 2018, nearly 300 overseas institutions had received quotas totaling roughly $100 billion. The quotas are granted by China's State Administration of Foreign Exchange (SAFE), and the quotas can be changed at any time in response to the country's current economic and financial conditions. The type of investments that can be traded as part of the QFII system include listed stocks (but exclude foreign-oriented shares), treasury bonds, corporate debentures, convertible bonds, and other financial instruments as approved by the China Securities Regulatory Commission (CSRC).

To be accepted as a licensed investor, certain prerequisites must be met. These qualifications are determined by the type of institutional investor who applies for a license, such as a fund management company or insurance business. For example, fund management companies must have at least five years of asset management experience and at least $5 billion of assets under management during the most recent accounting year. A certain amount of foreign currency, transferred and converted to local currency, is also mandatory for approval.

With the launch of the QFII program, licensed institutional investors can purchase and sell yuan-denominated "A" shares, which are shares of mainland China-based companies. Foreign access to these shares is constrained by specified quotas used to regulate the amount of money that licensed foreign investors can invest in China's capital markets.

New Rules Make the QFII Program More Attractive

Until very recently, foreign institutions invested in China’s stock or bond markets through the QFII program could only repatriate up to 20 percent of its investments every month. Also, each time a QFII participant sought to move money out of China for the first time, they were prevented from doing so by a three-month “lock-up” restriction. However, that has now changed.

As of mid-June 2018, China lifted both the 20 percent remittance ceiling and the three-month lock-up period for all new and existing QFII participants. As an added incentive, China for the first time now allows QFIIs to perform hedging to manage foreign exchange risks.