3rd February, 2017
At PIVOT we laud the Government of India for the announcements in the Union Budget 2017, concerning Foreign Portfolio Investors. The announcements relate - to ease Entry for FPIs, as well as extend the period/clarify on some of the Policies of the past. We believe these will add to Ease of doing business for FPI's. We bring a snapshot of the key announcements in the India Union Budget 2017, that assist Foreign Portfolio Investors; we look forward to a faster roll out of the common application form!!
1. Ease of entry:
2. Tax related:
3. Other Clarifications:
2nd July, 2016
The First Bi-monthly Monetary Policy Statement, 2016-17 by Dr. Raghuram G. Rajan, Governor of Reserve Bank of India on 5th April 2016, while proposing many forward looking changes- carried in Point 29 of part II (Banking Structure) of Part B: Developmental and Regulatory Policies II, “the need to explore possibilities of licensing other differentiated banks such as custodian banks….”. A paper is expected to be put out for comments by September 2016. This is welcome news!
This step will integrate Indian Capital Markets, increase efficiency, enable greater straight through processing and more importantly establish a level playing field between the Universal Banking set ups who also engage in Custodial Services (read Securities Services) and Institutions specialising in Custodial Services (read Securities Services). Globally, the concept of Custodian Bank is not new. Enabling Custodian Bank to operate in India will mean India adopts yet another global standard and processes.
PIVOT in Jan. 2016 advocated need to have Custodian Banks in India (article in LinkedIn)
Indian Capital Markets over 2.5 decades evolved rapidly and together with digital and other developments in the Banking Sector addressed many a risk related issues as well as inefficiencies. Adopting Global standards, best practices helped increase investors’ confidence and comfort in doing business- Local and Inflow.
The Government of India and Regulators (SEBI and RBI) have continually implemented initiatives for attracting foreign investments (Digital India, make for India, developing world class infrastructure etc.). In recent times, the introduction of FPI Regulations, DDP, uniform KYC and Payment Banks can be considered as significant developments in the Capital Market and Banking spectrum. Indian Capital Markets witnessed rapid strides, thanks to pro-activeness of SEBI and RBI in the last two decades.
In the Union Budget of 2014-15 the Hon’ able Finance Minister of India advocated the need to create a framework for licensing small Banks and other differentiated Banks. The Reserve Bank responded swiftly introducing the concept of Payment Banks and Small Banks, developing guidelines and awarded licenses to successful applicants. The announcements in the Monetary Policy Statement, 2016-17 is a step forward.
Development of the Custodian Segment in Capital Markets:
Custodians in the Securities Market undertake a number of Clearing and settlement related, Banking, regulatory compliance activities on behalf of Institutions, corporates, FPIs, Mutual funds, PE, FDI’s etc.
Globally the Custodial framework is comprised of two sets of service provider:
Typically, the above Listed Custodian Categories render similar Banking and Capital Markets settlement activities, except for the fact that Custodian Banks typically confine their activities related to Capital Market while Universal Banks also service non- Capital Market segment as well as Non- Institutional segment. Globally “Custodian Banks” exist in all developed markets and most of the emerging markets.
Some of the leading Custodians in the world are:
The Bank of New York Mellon; State Street Bank and Trust Company; JPMorgan Chase; Citi; BNP Paribas; HSBC; Standard Chartered; Northern Trust; Brown Brothers Harriman
The Bank of New York Mellon, State Street Bank, Brown Brothers Harriman, Northern Trust, are Custodian Banks whereas Citi, BNP Paribas, HSBC etc are Universal Banks.
Approximately 65% of India’s market capitalization of USD 2.1 trillion is comprised of Institutional Holdings. This space is growing rapidly. SEBI and RBI recognized the importance of Custodians in 1988. Stock Holding Corporation, India’s’ largest Custodian (a non-Bank Custodian) was the first Custodian to be granted license by SEBI. Presently 19 Custodians are recognised by SEBI. Other Non- Custodian Banks include Orbis, ISSL.
India’s Custodial framework broadly comprised of two sets of service provider:
Potential role of Custodian Bank in India:
1. Integrated services
Custodian Bank would offer cash management and foreign exchange transaction services and thus be as an integrated service provider catering to multiple requirements of the clients/segments
2. Easing entry of investors which have regulatory hurdles to entry India
A few jurisdictions do not permit institutional investors registered in that country, to maintain securities with Custodians that do not have Bank Status. The change potentially enables Inflows into India.
3. Level playing field
Universal Banks Custodians have an advantage in attracting FPIs due to their Banking status. Permitting Custodian Banks, increases the no’s of providers leading to competitive Custodial services.
4. Encourage all types of Foreign Portfolio Investors
SEBI’s FPI Regulations, 2014 enabled Category III investors to invest in India. Category III investors mostly comprise of small corporates, family offices, individuals, etc. They generally do not form “target segment” of Global Universal Banks Custodians, but could be potential clients of Custodian Banks. This potentially enables inflows into India.
5. Making Domestic Player more attractive for tie-ups
Global Custodians Banks such as Bank of New York, State Street Bank etc do not have India presence and mostly use Foreign Universal Custodians as their Sub-Custodians. If Custodian Bank services are enabled, the Global Custodians may consider tie-up with domestic Custodian Banks and may even consider a more active role.
6. Administrative problems
Currently Non- Bank Custodians in India maintain Multiple Banking relationship. Collecting funds from various Banks, remitting them to the Clearing Corporations crediting the accounts of the clients in different Banks results in enormous administrative work, weaker STP and costs. These extra steps can be eliminated.
7. Reduce, Streamline AML and KYC documentation requirements
The introduction of Custodian Bank will lead to reduction in the documentation requirements as documents will be required by a single entity vs the requirements of non- Bank Custodians.
8. New opportunities
RBI has allowed the Indian investors to invest abroad. Some of the Indian Mutual Funds have invested in other jurisdictions. Custodian Banks can meet the requirements of such mutual funds through tie ups with overseas providers of custodial and Banking services.
9. Encourage entry of Global Custodian Banks
Enabling “Custodian Banks” may encourage Global Custodian Banks to enter India and offer Custodian services. Their entry may bring greater competitiveness in the service offerings to the benefit of the Investors.
“Custodian Bank” in India, may render the following functions:
Custodian Banks would offer cash management services including opening, maintaining and servicing of client’s current account, issuing demand drafts and pay orders to clients, remittances on behalf of clients, participation in clearing functions, transfer/remittance of funds and maintenance of credit balances incidental to securities transactions.
Custodian Bank may provide MIS relating to the client’s integrated cash and custody positions, incorporating settlement flows and incomes from dividend and interest. Being privy to the client’s custody positions, the Custodian Bank will be able to provide its clients with up to date positions on the cash received. This will enable the client to engage in effective Treasury Management.
The Custodian Bank would seek an Authorised Dealer Category -1 license (AD 1) It will maintain Nostro accounts, enter into spot and forward exchange contracts with clients, take part in International Settlements and funds transfer through SWIFT. It may establish correspondent Banking relationships.
Custodian Bank may offer SGL services to its clients for investments in Government debt a growing segment in India.
Currently, non-Bank Custodians route settlement flows to the Clearing Corporations through another Banker which acts as the Settlement Banker. In the new scheme the. Custodian Bank could act as settlement Banker for its clients resulting in savings in terms of transaction cost and greater STP. Thus eliminating an extra processing leg.
Custodian Bank would be in a position to meet with regulatory requirements (especially banking) on its own rather than relying on other service providers.
Benefits of permitting “Custodian Bank”
Institutions that would be permitted as Custodian Banks would benefit from- assuming greater accountability, reach higher level of straight through processing, assume higher degree of risk management, have lesser external dependability, lower costs, consolidated AML and KYC documentations, higher transaction confidentiality, greater control and compliance, Regulatory reporting. Custodian Bank may also provide focused and comprehensive services to Investors while reasonably mitigating their risk vs. those as is in the case of Universal Banks.
Besides attracting Global Custodian Banks, it will also facilitate India based present Non-Bank Custodians to participate actively in servicing all classes of investors effectively. India would also benefit from moving away from the unique and self-defeating Non-Bank Custodian Framework, to the globally accepted Framework of Custodian Bank. Investor confidence and acceptance (local/Inflow) will potentially increase.
The conversion of Custodians into Custodian Banks, guided by RBI Regulations, under the new “Niche Segment Banking” will benefit Investors, develop capital market infrastructure, develop the Institutions offering Custody, minimalize risks, promote greater Straight through processing, usher competition and best practices. It will also complement the “Ease of doing business in India” with “Ease of investing in India”. Thus there exists a strong case in enabling Custodian Banks.
PIVOT from time to time, shares thought leadership notes and initiatives. We would likewise like to hear from you.
THE RBI ANNOUNCEMENT IN OUR VIEW IS A WELCOME STEP!
14th January, 2016
The Indian economy is on an upswing, capital markets are doing well with new IPOs and wealth creation on rise. IS THAT GOOD ENOUGH?
Increasing FPI Inflows-Improving Capital Market and Banking Infrastructure This note dwells on increasing the attractiveness of Indian Capital Market for FPIs (Foreign Portfolio Investors) by developing Capital Market and Banking Infrastructure. The suggestions relate to revisiting of Policies/ procedural improvements/implementation. The overall effect of these “easy- to- fix- issues” is it improves access to India, makes India more attractive as costs reduce, introduces global practices, provides comprehensive information, reduces costs of operations. The access time can be reduced from 4 weeks to one week!
FPI, Category III, a new segment gained access to Indian Capital Markets since June 2014. This segment has the potential to inflow USD 6-7 Billion USD annually. The inflow will primarily be from countries where wealth management is well developed as well as countries where High Networth Individuals/mass affluent investors, Trusts etc exists. Potential countries being Japan, Korea, Canada, certain European nations, Australia, China, Hong Kong, Singapore- to name a few. Inflow from this segment has been a trickle for a variety of reasons, a key being it is not a target segment of the big foreign Custodians/ Brokerages (they deal with large institutional segment);different profile; and perceived notions of category III prospects that India is difficult to Access!
To quote a prominent Japanese Securities firm we met with recently, “The Indian authorities may be able to get the two nations closer by further improving the FPI framework. While we appreciate that the Indian authorities substantially have reformed their FPI regulations, the reform seems to have stopped short of accommodating the majority of Japanese investor. This hurdle is probably accountable to the difference in the profile of client base between the US/Europe and Japanese intermediaries. The Indian authorities may have yet to recognize the profile of lucrative client base in Japan to get the two nations closer than ever. We in Japan rarely have investors with net worth of hundreds or even 50-60 million dollars. The majority of Japanese investors that national intermediaries like us cover with the networks of hundreds of branch offices have a net worth ranging from a half to one million dollars. They are “mass affluent investors” rather than high net worth individuals. Japanese intermediaries earned nearly or more than a half of their revenues from commissions on non-Japanese securities. In their portfolio, Indian securities remain very marginal due to the complexity of the FPI clearance procedures.
Indian IT technologies may help the Indian authorities attract Japanese investors. An excellent example is the e-Tourist visa online facility has remarkably improved the efficiency of Indian visa issuance. A regulatory reform approach that capitalizes on the same or similar IT technologies of India seems to fit the market of mass affluent investors like the Japanese retail investor market. The Indian IT technologies may enable the Indian authorities to screen out Indian investors disguised as foreign investors while effectively capturing the profile data of legitimate mass affluent investors.
In addition, the Indian authorities may wish to consider drastically simplifying the FPI registration procedures for mass affluent investors by weighing the cost-benefit of the registration. I believe that the chance is very slim that mass affluent investors in Japan would threaten the integrity of the Indian securities market by acting in concert with other fellow investors.Do you think that the above helps to find out some forward-looking solutions that may benefit Indian and to facilitate Japanese portfolio investment in the Indian securities market.”
Since 2014 June the total number of new FPIs (mainly category I, II) registered with SEBI is about 2006. The total number of FPIs and FIIs (including sub-accounts) number is approx. 8,800(as per NSDL website). There is a scope to add another 10,000 FPIs of category III. The marketing approach wrt Category III has to be different. The note highlights the initiatives of SEBI, BSE as well as of NSDL and NSE.
The BSE-ICCL Handbook, “FPI- Easing Access to India”; SEBI’s FAQ for FPIs; The Ministry of Finance’s handbook, “India Fact book” brought out by the Capital Markets Division of Economic Affairs in 2012, carry credence with FPIs.
Unlocking Registration process and Custodian Banks Concept: Global practices
The unlocking of the registration process (now done by Designated Depositary Participants) has made registration process faster than what existed prior to June 2014.However as DDPs are required to invest in additional resources and systems, FPIs have to pay an additional initial fees to DDPs, over and above the one prescribed by SEBI. This marginally increases the costs as well as get queried by FPIs, especially the category III! Further SEBI wrt FPI category III has a registration fee of USD 100 p.a. Ironically cost of fund transfer incurred by FPIs is USD 20 per transfer.
Introducing Custodian Banks in India is a long felt need. This forms part of the note. We feel this will spur DDPs to reach out to clients more effectively as India embraces one more Global practice.
Driving the Reach to FPI’s
FPI's(especially Category III) investment decisions are driven by Fund managers who are best targeted by Brokerages, Tax Firms, Legal Firms and Wealth Managers. India should develop/ advertise in marketing Collaterals and engage in Roadshows. Custodians have a limited role as their clients are normally FPI’s Operations team concerned with Account opening, Onboarding, Settlement, Operations, banking, Compliance and risk related matters.
In effect this note dwells on Making India- Faster, Efficient, Competitive, Informative, Affordable by developing the capital market infrastructure.
FPIs’ decision to invest in India is determined by three key factors:
1. Investment scenario and opportunities
2. Taxation implications
3. Capital Market Infrastructure -ease of entry and operations
India fares well wrt the first counts: Political stability and greenshoots in Economy is growing investor confidence; MAT issue has been capped. Point 3 refers to capital market infrastructure that has significantly evolved over the last decade and half. India emerged from T+ endless settlement to T+2 market (Europe still has T+3 market). BSE being the fastest as well as one with most listed stocks in the world; NSE amongst the top 5 by volumes are a few examples of advancement made.
Adding to the above, the introduction of FPI (Foreign Portfolio Investors) Regulations effective June 01, 2014 has raised the attractiveness of the Indian Capital Markets. India now follows the Globally accepted, ‘Risk based profiling’ of investors. The Regulations has eased entry process, enabled access to multiple capital market segments, for all categories of Investors.
Over the last 19 months over 1300 FPIs have registered with SEBI through DDPs (Designated Depositary Participants). In all approx. 8500 FII/FPIs are registered. With KYC processes being significantly eased the access time has dropped from 6-8 weeks to 3-4 weeks. IS THAT GOOD ENOUGH?
Category III represents a new class of Investors, including non-broad based funds, Trusts and HNI clients. Generally, these are wealth Management segments. Their awareness of Indian Related developments (three aspects, as outlined above) is very limited versus those of Category I, II who have been exposed to India over the last two decades. Globally, In the case of category III type of investors, investment decisions are driven by factors such as ease of access, costs, product-segments, liquidity, documentation, education (information) and awareness of Capital market systems, to name a few.
FPI related Initiatives of SEBI, BSE, ICCL, NSE have been proactive and aimed at addressing International Investors interest. The BSE-ICCL’s handbook, ‘FPI- Easing Access to India’ the first of its kind, as well as BSE’s newly launched webpage, ‘International Investor’ are quite informative. BSE’s initiative to educate those who service FPIs, through its country wide initiative in 2015, ‘FPI’s- All that you want to know’ was attended by over 680 practitioners across Delhi, Mumbai and Kolkata. SEBI’s FAQ on FPI as well as NSE’s webpage ‘International Investors’ are other leading initiatives of information dissemination. In a limited way, Intermediaries (Brokerages, Custodians, Banks, Tax firms, Legal firms) have reached out, mainly to category I and II.
IS THE ABOVE GOOD ENOUGH? We believe the above have set up the momentum to make India attractive for FPIs. However, we believe a number of easy-to-fix-issues need to be resolved to increase significantly the attractiveness of the Indian Capital markets, especially wrt Category III. These relate to point 3 above. We capsule them as below:
The Five EASY-TO-FIX ISSUES AND SOLUTIONS to significantly increase attractiveness
|1||Make India faster||PAN simplification||14 days to get PAN Reg.||1 day to get PAN registration||Invest in a week vs existing 3-4 weeks|
|2||Make India efficient||Custodian Banks||Non-Existent segment||Introduce Global Model- Custodian Bank||Diverse and competitive|
|3||Make India competitive||Interest payment on FPI balances||Regulations not permitting||Enable interest payment upto 1% on FPI balance||Reduces significantly cost of investing in India|
|4||Make India Informative||Structured information dissemination||Patchy information||Disseminate Comprehensive structured information||Faster understanding and greater confidence, especially by Cat. III|
|5||Make India Infrastructure affordable||Outsourcing Operations Interoperability of Clearing Corporations||Non existing||Clarify, implement||Reduce costs|
Note: The above solutions will benefit all the three categories as well as the service providers (Custodians, Banks); however, points 2,3 and 4 will particularly benefit Category III.
1. Make India FASTER- PAN:
FPIs need to have PAN, before investing. The current process takes up to 2 weeks from the time of submission of the forms. FPIs have expressed that while it takes 2 days to start investing in other markets, the two weeks’ process to get PAN is self-defeating and discouraging!
Solution: The E-VISA way! Foreigners visiting India have complimented that it takes 17 hours to get a E-Visa (compared to the earlier timeline of 3-4 weeks). Thus while it has become easier for lakhs of Investors, tourists to physically enter India in 24 hours, the current PAN card process keep FPIs (totaling a few thousands annually) waiting for two weeks before they can invest! We should replicate the E-VISA model and issue E-PAN within 24 hours. It reduces access time to 1 week, from the current 3-4 weeks.
Required:Income tax department together with NSDL to provide a functionality enabling grant of E- PAN (modelled on lines of E-VISA) in say 24 hours. The physical PAN card can follow!
2. Make India EFFICIENT- Enable Custodian Banks:
Globally the Custodian models that exist are: Universal Banks Custodians and Custodian Banks. India has Universal Banks and does not have Custodian banks however has 4 Non- Bank Custodians.
Stock Holding is India’s largest Custodian by assets and volumes, market share, man-years of experience and local market experience. Together with three other institutions (Orbis, Edelweiss, ISSL) they are NON-BANK Custodian registered with SEBI. Enabling the four to convert to Custodian Bank will usher a Global practice, do away with local legacy system, increase efficiency, provide greater choice to Category III investors, reduce risks besides enabling many other benefits. Foreign Custodian Banks, given their global Business model, concentrate on Category I, II segment and not on category III, while Indian Custodian Banks primarily concentrate on Category III. Its necessary that initiatives should be put in place to encourage the India based Non-Bank Custodians to convert to Custodian Banks, so that more institutions will reach out Category III investors effectively and aggressively.
Solution:RBI to consider Non- Bank Custodians to be eligible for becoming Custodian Banks under its category of, ‘differentiated Banks’. PIVOT has developed a detailed working paper on Custodian Banks. We will share if required.
3. Make India COMPETITIVE- Enable Interest payment on FPI balances:
RBI regulations require FPIs to pre-fund their transactions (open a SNRR account with an Authorized Dealer); overseas investors have to maintain the balances/send funds in advance to Universal Banks Custodians Universal Banks Custodians / Brokerages are not permitted to pay interest to FPIs on the latters Rupee Balances lying with the Universal Banks Custodians/Brokerages SNRR(Special Non- Resident Rupee) account is a non-interest bearing Current account).RBIs definition of the permitted credits to the account as well as permitted debits are well defined). Ironically RBI Regulations do not prohibit Universal Banks Custodians /brokerages to deploy the FPI balances lying with the Custodians/ Brokers. Thus Universal Banks/Brokerages effectively employ such balances in treasury activities and are known to earn interest of upto 6% -7% p.a (in effect 600-700 basis points), on the balances. The collective balances at any given point of time would be in region of upwards of USD 1 Billion.
Thus while Universal Banks Custodians /Brokerages earn interest on FPI balances, regulations forbid them from making payment to FPIs. Roughly 60% of a custodian’s revenue in India is on account of such income(non-core) while globally it is about 10% given the lower interest rates overseas. The unfavorable fallouts are- FPI’s are deprived of an income on their balances; the Universal Banks Custodians may use such non-core income to subsidize other segments (e.g local) thus making it difficult for the Non-Bank Custodians (Indian entities) to compete.
Solution:RBI to permit Universal Banks Custodians /brokerages in India to give FPIs upto 1%(100 basis points (bps) interest on the FPI’s balances) this may mean modifying the SNRR account. In effect India will be 100 basis points more attractive, thereby significantly reducing the FPI’s cost of investing in India. The upside could be it may attract more volumes/ investors who earlier shied away on account of relatively higher costs. Though such a step may impact the non-core revenues of the Universal Banks Custodians/Brokerages from existing business, it may lead to addition of new clients/higher volumes as well as facilitate a level playing field across all Custodians/Brokerages. This significantly improves positive perceptions about lower Investment costs in India.
4. Make India INFORMATIVE- Information flow:
SEBI’s FAQs for FPI’s are informative and comprehensive. However, Category III Investors (mainly first time Wealth management clients) will need hand holding wrt information on how to invest in India and the possible structures.The perception that India is a difficult market to access, is high. In this regard the BSE-ICCL’s all encompassing Handbook,” FPI- Easing Access to India” has been found very useful by FPIs. Web pages of BSE, NSE have useful information for the International investors.
Solution:The comprehensive Handbook needs to be widely circulated as well as in diverse formats (multi lingual; video clips etc.) for a consistent understanding of the various aspects. Similarly, the India Factbook on the MOF website needs to be updated and widely circulated. Mass scale visibility of the availability of information organized on the lines of “Incredible India” needs to be implemented. PIVOT can assist in determining possible multiple strategies which can be devised by leveraging Embassies, trade bodies, intermediaries etc.
5. Make India Infrastructure affordable:
Finally, Marketing and Roadshows are critical.They need to be researched well as well as targeted by collaborating with home country local institutions. For e.g. while targeting Category I, II FPIs the brokerages generally interact with Fund managers and Custodians interact with Global Custodians. Fund Managers are interested in Investment opportunities, Global Custodians are interested in Settlement and tax related.
While targeting Category III the brokerages need to target wealth managers or their counterparts in a particular jurisdiction, while Custodians need to meet the operations and marketing team of the same entities (and most often than not the Global Custodians). In this regard the Exchanges and the various wealth management and Brokers fora can play a pivotal role.
Viraj is founder and CEO of PIVOT Management Consulting, India’s specialist Securities Services Consulting firm. Viraj’s Securities Service experience as India Country head at 3 of the top 5 Global Custodians (Citibank, JP Morgan Chase, BNP Paribas) and as Country Head at Citibank Switzerland provides an in-depth exposure to emerging and advanced Capital Markets. He also served as Operations Head at Morgan Stanley Securities, India and BSE. Viraj is the only Indian of the six Asians to receive a personal recognition for leadership in India from GLOBAL CUSTODIAN magazine through ASPAC Industry Nomination. A fellow member of the ICSI India, he is on industry committees related to Capital Market development.
Weblinks of PIVOT’s thought/market leadership FPI initiatives of 2015