Buying into Wal-Mart & Coca-Cola? RBI's got the key

NEW DELHI: Freeing up of individual investments upto $25,000 in foreign assets has necessitated a review of the existing RBI guidelines governing overseas equity investments by individuals. Top RBI executives told ET they are realigning Jaswant Singh’s latest sop for high networth individuals with the existing guidelines for overseas equity investments by individuals, which are in conflict with the latest announcement. The existing guidelines permit unlimited overseas equity investments by individuals with a rider. Only foreign companies that hold a minimum 10% stake in a company listed on Indian stock exchanges are eligible. This makes most global blue-chips such as GE, Wal-Mart, Coca-Cola, Unilever and Citi unavailable to Indian investors. “Only few top gear global stocks have subsidiaries listed in India. Of the listed, many have their parent holdings through the latter’s Mauritius-based arms, which leaves very few investment opportunities,� said Ashim Syal, CIO of ING Vysya MF.
RBI sources admitted that the latest investment relaxations for individuals has created a piquant situation. Though they refused to confirm, indications are that the 10% shareholding restriction may be done away with. “There’s no firm view yet. The latest announcement is a step towards more liberal capital account convertibility. Logically, the existing restrictions should be removed,� said a source.
The investment rider seems to be the reason for the lukewarm response to the freeing up of overseas investments by individuals, MFs and corporates announced last year. No data is available but sources said no worthwhile investments have been made under the channel. Besides, the bull run on the domestic bourses and the high cost of acquiring stocks in most developed markets have also acted as deterrents.
Global brokerage rates for equity buying are pegged at a minimum of 2.5% of transaction value. Charges climb progressively for larger sized deals. Indian brokerage charges are much lower at 0.25%. In addition to dearer brokerage charges, minimum trading charges that are unheard of in India are also levied.
Due to the high cost of equity trading, 80% of the developed world retail investors opt for the MF route and MFs account for about 80% of total volumes. Thus, global stock exchanges see transactions in lots of thousands of shares unlike the NSE and the BSE where trades for even a single share are executed.
Individuals can’t buy global blue-chips through MFs as the MF guidelines have not been relaxed. Transaction costs for investments through global MFs are much higher as domestic MF investments enjoy income and dividend tax exemptions.
Though MFs were granted permission in late ‘02 and guidelines were issued in April ‘03, only two overseas investment specific MF schemes were so far launched. But even they received lukewarm retail responses. “We have only invested in ADR/GDR issues of domestic companies till date. While the government has allowed overseas investments in stocks, we are awaiting a clear list of invisible companies. Moreover, at the current juncture, we believe that domestic markets offer more opportunities. Investing in foreign equities will be a long term process in our opinion and we believe that those fund houses that have a global presence will be in a better position to make such investments,� said head of equity Franklin Templeton CIO R Sukumar.
This ‘03 guideline for overseas equity investments by individuals, mutual funds and corporates also restricts MF investments to a collective industry-wide cap of $1bn and individual ceiling of $50m. A lower floor of $5m per MF has also been imposed. Corporates can invest upto 25% of their networth under the channel.