Facilitating Foreign Investment in India

The Indian government prioritizes foreign investment to stabilize the Indian currency. Various channels for foreign funds include:

• Foreign Direct Investment (FDI)
• Remittances
• External Commercial Borrowings (ECBs)
• Foreign Portfolio Investment (FPI)

FPIs, while critical to liquidity, are considered unreliable for long-term financial stability, with the government utilizing short-term measures to attract them.

FPI Dominance and Market Trends

Despite a decline, FPIs hold a significant share in market capitalisation:

• Share decreased from 20% a decade ago to 16% now.
• Market share has shifted to retail investors and mutual funds post-2016 demonetisation and due to low interest rates between 2020-2022.
• Mutual funds increased their market capitalisation share from 4% in 2015 to over 10%.

FPIs aid price discovery and influence domestic investors due to their global operations.

Regulatory Stance on FPIs

The government's approach towards FPI regulation fluctuates between liberal and cautious:

• Measures for "ease of doing business" include categorizing FPIs, risk-based KYC norms, and a streamlined onboarding process.
• The cautious approach addresses concerns of round-tripping and money laundering.

Procedural and Tax Policy Considerations

Key regulatory principles for FPIs include:

• Tracing the ultimate beneficial ownership (BO) down to the natural person level.
• Monitoring NRI participation through FPIs.

Tax policies should not offer concessional capital gains tax rates for FPIs over domestic investors to prevent round-tripping. Rationalizing the tax structure should ensure uniformity and remove the securities transaction tax for a consistent policy.

Conclusion and Recommendations

FPIs improve liquidity and price discovery in capital markets. However, enticing them with short-term concessions is ineffective for currency stabilization. Instead, the government should focus on increasing FDI as a sustainable solution, acknowledging the ongoing deliberation since the 1990s economic reforms.