South African group Sanlam has completed the first major direct equity investment into an Indian firm via the country’s recently revamped qualified foreign investor (QFI) scheme. It is hoped this may pave the way for more such transactions to access Indian stocks.
The $111 million share purchase in listed Shriram Transport Finance was finalised last week, increasing its shareholding to 10%, from 7% previously.
It comes after the QFI programme, which was launched in 2011 to allow foreigners to invest into domestic mutual funds, was expanded to include equities at the start of this year.
The Sanlam deal takes total direct investment into listed Indian equities through the QFI scheme to Rp6.8 billion ($126 million), meaning it represents 88% of this universe.
Gerrit van Heerde, chief financial officer within Sanlam’s emerging markets division, suggests the financial services firm may consider more such deals through QFI, since it is now possible to invest directly into an Indian target company rather than indirectly via its holding group.
“India presents attractive investment opportunities despite the risk of market volatility,” says Van Heerde, pointing with optimism to sectors including insurance and asset management.
Unlike the foreign institutional investor (FII) scheme, foreign investors using the QFI route do not have to register and get approval from the Securities and Exchange Board of India before investing.
The QFI route relies heavily on know-your-customer (KYC) assessment by custodians, or qualified depository participants, but importantly the time-to-market is reduced because the approval process is generally quicker (saving up to eight weeks by avoiding going through the Securities and Exchange Board of India).
The volatility that Van Heerde touched on was at its most acute in April and May last year, amid huge FII outflows after India’s former finance minister, Pranab Mukherjee, announced the introduction of the general anti-avoidance rule (GAAR).
This controversial proposal was designed to clamp down on tax evasion, but was repeatedly delayed to allow revisions amid widespread foreign investor grievances and divestments. A watered-down version was finally introduced in September last year.
Sanlam made its QFI investment into Shriram Transport Finance through Citi, which is both its custodian and execution broker.
Debopama Sen, managing director for securities and fund services at Citi, suggests the QFI route could be an appropriate investment avenue for foreign investors that do not fit into the regulatory guidelines governing FII, such as corporates, family offices and high-net-worth individuals.
“The QFI route definitely makes it easier and quicker for foreign investors to gain access to the local capital markets by going through the KYC procedures and opening a QFI account with a QDP/Custodian,” she says. “There is no need to undergo a market registration process.”
Van Heerde notes that Sanlam’s relationship with Shriram started when it invested into its life insurance and general insurance businesses in 2005 and 2008, respectively. As a joint-venture shareholder, Sanlam has also served as a technical partner to these insurance units.