‘India has potential to add 2,000 FPIs over next three years’
Interest of foreign portfolio investors (FPIs) in India will increase given the roll-out of T+1 settlement, access to the commodity segment, developments at GIFT City and higher weightage to India, says Viraj Kulkarni, founder, Pivot Management Consulting, a securities services firm. In an interview with Ashley Coutinho, he says geopolitical developments, issues faced by non-bank custodians and the pace of disinvestment could be the likely constraints to flows. Edited excerpts:
What is your outlook for FPI flows?
What is your view on FPIs being allowed into commodities derivative market?
India is the fifth-largest jurisdiction in exchange traded commodities on the strength of domestic investors. Enabling FPIs (in non-agri cash contracts) adds cross border investors, more volumes and global recognition. It expands the range of products for FPIs and provides an opportunity for a new class of FPIs to access India. Robust risk measures headlined by Sebi and effected by the exchanges, add to the confidence and continuity. Non-agri commodities account for more than 35% of the volumes on MCX. From the past experience, Sebi may expand the segments, enable delivery-based contracts, boosting the commodities market.
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How is the transition to T+1 settlement system working for FPIs?
The phase-wise launch of T+1 has been a success and will add liquidity and drive product development. This has to be viewed against the backdrop of diverse investors operating from over 400 locations, the multiplicity of exchanges, depositories, clearing houses and over 1,500 actively traded stocks and much more. Challenges could be in the form of higher costs on account of technology investments, a dormant securities lending market, bank risks that non-bank custodians are exposed to, concentration risk and operational aspects.
How is India faring in terms of new FPI registrations?
Last year, Sebi registered almost more than three FPIs per working day, in spite of the lull during Covid-19. The numbers can be higher if omnibus structures are allowed. Digitisation has eased access. MNC custodians have created visibility in new jurisdictions to tap FPIs. Enabling Category I FPIs from Cyprus, the UAE, Mauritius, Singapore and the GIFT City has provided greater thrust. More can be done by providing non-bank custodians limited banking licence while sourcing FPIs. T+1 will reduce the cost of investing in India and attract more FPIs. Over the next three years, India has the potential to add over 2,000 FPIs with a total AUC of over $1 trillion.
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You were recently inducted in the GC Hall of Fame by Global Custodian. How has the custodian business evolved in India over the years?
The ‘Global Custodian Legend’ recognition is the highest individual recognition among custodians worldwide. India today has 18 custodians comprising foreign and domestic ones, with a combined AUC of $2.1 trillion. Custodians have embraced digitisation; client centricity and product development has become the new mantra. From operational and financial risk management to product diversity; from settling one type of security to multiple ones, the standard of custodian services in India is better than the global average in emerging markets. In effect, custodians have helped shift the perception of India from being an operationally risky country to one with easy access and almost zero risks.
What do you make of the initiatives at IFSC GIFT?
IFSC GIFT has the advantage of being a deep domestic market unlike some of the other IFSCs. This reduces costs and improves attractiveness. The regulator has already addressed many policy and operational challenges. IFSC needs to seek out global expertise, move towards greater digitisation with respect to onboarding clients and position products better. Every IFSC has a niche; for example, UCITs is identified with Ireland and Luxembourg. So, too, GIFT IFSC needs to invest in developing a niche identity. I guess this will shape over time as well as enable funds to be located out of GIFT City.
