India’s asset servicing industry has the eye of the tiger because despite the devastating impacts of the pandemic, it has made positive market reforms which will encourage investment as markets recover
India is a populous country renowned for its rich and deliciously flavored food, and impressive architecture like the Taj Mahal. Its cricket team also just ended a 50-year wait with an Oval Test win. This beautiful and vibrant country began the year with optimism but has unfortunately faced a period of severe challenges due to the COVID-19 pandemic. Despite this, however, India’s domestic capital markets are still an attractive investment destination for foreign institutions. In the asset servicing space, the market has made positive market reforms which will encourage investment as markets recover.
“We are seeing lower barriers to entry with the introduction of liberalising measures for foreign portfolio investors (FPIs) making it easier for foreign institutions to participate in the country’s domestic market,” says Chaitanya Joshi, head, securities services, India, Standard Chartered.
As an example, Standard Chartered has seen the streamlining of the know your customer (KYC) rules for Category FPIs and lifting of restrictions on issuing and subscribing to offshore derivative instruments (ODIs) such as participatory notes (p-notes).
The Government of India, along with Securities and Exchange Board of India (SEBI), also launched the Common Application Form (CAF) in February 2020. This form acts as a one-stop application for FPI registration, primary account number (PAN) application, and KYC registration requirements in India, which has significantly simplified the account opening process.
Additionally, participants are seeing the introduction of investment routes like the Voluntary Retention Route (VRR) and Fully Accessible Route (FAR) which have opened up the investment routes available for FPIs.
More recently, the Reserve Bank of India (RBI) said it will be allowing Authorised Dealer (AD) banks to lend to FPI clients for margins on Government Bond and Treasury Bill trades.
Industry participants have also identified that recent successful multi-billion dollar public offerings and pipelines of IPOs are indicative of the ability of new-age entrepreneurs to attract capital, showing a maturity of the Indian markets in terms of valuing start-ups with innovative business models.
With much momentum in this space to lower barriers of entry, there has also been a notable uptick in India’s benchmark indices, which has resulted in approximately 36 per cent return since the start of 2020 in the Bombay Stock Exchange’s Sensex and approximately 17 per cent since 2021, where the market cap of Indian listed equities has crossed the US $3 trillion mark for the first time last month.
In 2020, India was the fifth largest recipient globally of foreign direct investments (FDI) totaling $64 billion (USD) and this year the FDI inflows have amounted to more than $26 billion (USD) until May 2021, according to the World Investment Report 2021: Investing in Sustainable Recovery.
Meanwhile, on the domestic front, industry participants are seeing healthy growth in funds under management at both traditional mutual funds and alternative investment management vehicles.
Anuj Rathi, managing director and head of securities services India, HSBC explains: “India is experiencing a very encouraging shift in household asset allocation with higher retail participation in the equity markets — in the last five months, there have been over 10 million new investor accounts opened at the depositories.”
Rathi adds: “This all strengthens India’s position as one the top investment destinations, and a place to be for asset servicing players, which I believe emanates from macro-economic stability, sustained policy reforms and longer term prospects of the country.”
A plethora of opportunities
Considering the future growth prospects of the country and its economy, it is clear that India offers a plethora of opportunities for asset managers and asset services.
According to Rathi, the market infrastructure is mature and offers product innovation, robust risk management and transparency to participants. Owing to the stability of the market platforms, asset managers are assured of consistency in operations even during times of wider market fluctuations.
Recently, simplified norms for investing in real estate investment trusts (REITS) and infrastructure investment trusts (InVITs) have generated interest from global asset managers. InVITs are a hybrid between equity and debt investment. This is set to further attract new opportunities to India’s marketplace.
Rathi observes that environmental, social and governance (ESG) and sustainable exchange traded funds (ETFs) are also emerging as the two investment dominant themes, which demonstrates that India has embodied many of the global trends present in the private markets.
Weighing in on the opportunities in the pipeline for India, Mandar Mhatre, managing director, Apex India, comments: “We are excited by the prospect of the launch of Gujarat International Finance Tec-City (GIFT City) at the country’s International Financial Service Centre (IFSC).”
Measures announced by the government are a significant statement of intent, designed to seize the opportunity to position India as a challenger to existing established fund jurisdictions such as Hong Kong and Singapore.
Mhatre says: “Over the coming years, we see a huge opportunity as funds seek to redomicile offshore feeder funds to the onshore financial centre. In addition, through GIFT City, India has the right environment to help it become the globe’s next aircraft leasing and finance hub.”
Technological growth
Technology is also set to encourage growth opportunities in India. Although Indian asset managers have traditionally used in-house software platforms to report to investors and run their businesses, managers now understand that keeping operations in-house also means owning the associated risks. As a result, they would rather outsource this to a reliable third-party. Mhatre says this means that for a fraction of the cost, Indian asset managers can take advantage of the latest, most advanced technology and are offered greater choice through a combination of the provider’s joint ventures with technology firms, as well as their own proprietary platforms.
“Increasingly, Indian clients are adapting to this model, allowing them to meet technology global standards and improve their marketability with potential limited partners,” Mhatre identifies.
Similarly, HSBC’s Rathi highlights there is a phenomenal opportunity to utilise new technologies and fintech solutions in the Indian markets that are taking the lead in enhancing innovation and efficiency. He explains: “There is a perceptible shift on adoption of newer technologies across the breadth of securities services — clearing, settlement, corporate actions and foreign exchange services.”
A recent example is the move by the Securities and Exchange Board of India (SEBI) asking depositories to apply distributed ledger technology (DLT) for recording, monitoring and creation of securities, and covenants of non-convertible securities.
HSBC has recently launched a Foreign Investor Onboarding Portal that aims to significantly improve the market entry experience for foreign investors on the basis of these changes.
Types of tech
Joshi notes there has been phenomenal growth in India over the last few years. Standard Chartered has noticed a host of new technologies being explored and used to enhance the asset servicing industry:
Cloud technology: Custodians in India have moved on to cloud connectivity with the depositories, which enabled smooth functioning during the pandemic scenario.
Application Programming Interface (API): APIs are being developed between the exchanges and some custodians. This will help shorten processing times.
Automation: Proxy voting services, which used to be a highly manual process, have now seen a lot of technological enhancements and automations to make it seamless thereby increasing efficiency.
Digitisation: The acceptance of digital documentation has improved the ease of doing business. During the lockdown periods in 2020, SEBI simplified the registration process for FPIs (which previously involved submission of physical documents and common application form) by allowing the use of digital copies of KYC documents for the onboarding process.
This was applauded and welcomed by the foreign investor community and there is now a stronger push for the process to be less paper intensive and for the FPI registration to be further digitised. It is currently pending consideration with
the Indian regulators.
Challenges
One of the key challenges in India is attracting and retaining talent. Initiatives from the Indian government are set to create highly skilled jobs across the value chain including in financing and asset management, and India needs to ensure it can meet this demand.
“The existing measures such as technology, infrastructure, an accommodative tax regime along with a culture of innovation need to be matched with investment into creating a deep pool of talent. In turn, asset servicers must provide attractive workplaces to retain the best talent, through creating a supportive and progressive culture, offering opportunities for progression and championing equality,” says Mhatre.
Constantly changing regulations has also caused challenges in India, similar to those faced in other markets across the globe.
HSBC’s Rathi highlights that India has a supportive regulatory framework, in comparison to securities and fund markets of similar size, owing to a number of major reforms in this space.
Some of these reforms include simplification of access norms, and easing of sectoral investment caps, that have made the process of investing into India much more efficient.
However, Rathi notes: “Continuing on this journey, I think there is scope for further simplification of the market access norms that constantly rank high in the thought process of global asset managers.”
Aside from the need for further simplification in the regulatory space, another challenge can be put down to legacy technology issues and the lack of agility in the current system infrastructure.
For example, the requirement of SEBI for custodians to collect, monitor and report information, with respect to the holding of Indian companies across onshore and offshore like depository receipt (DR) and ODI across registered FPI and their group entities, will require data and system enhancements of both parties to ensure accuracy.
Furthermore, as SEBI looks to reduce the settlement cycle from T+2 to T+1 to reduce settlement risk, custodians must look at how they can meet the pre-funding requirements that this is likely to present.
Joshi suggests this may be introduced alongside effective processes which may, in the short- or even long-term, be extensively manual and require additional handshakes between market participants
Rathi adds: “The easing of caps and restrictions on FPIs’ investments will help ensure that the process becomes more efficient and less intensive on compliance. In the medium-term, a unified framework that simplifies and harmonises the various foreign investment frameworks and reduces operational and compliance costs for the market will provide investors with a platform for the future growth of investments into the country.”
Continuous evolvement
As the market in India evolves, regulators continue to look at changes to make the Indian markets easy to access, while at the same time ensuring the risks associated with an open market are kept under check. With an eye on the huge growth potential technology is bringing to the market, Joshi states “regulators are encouraging asset management companies and payment service providers to make use of technology to ensure all data being dealt with is kept secure by way of encryptions and API-type system infrastructure”.
Indeed, technology and innovation will play a huge role in how India’s marketplace evolves.
Joshi states: “India is home to 21 ‘unicorns’ and the number of start-ups joining the club is growing at a fast pace. The country is recognised as the second-largest start-up ecosystem globally with many positive factors attributing to the growth of this ecosystem, including cost-effectiveness in the availability of resources and outsourcing.”
The unicorn list is a list of the most valuable private equity or venture capital-funded companies in India founded after 2000, ranked according to their latest funding round valuation.
Meanwhile, Rathi predicts: “The growth momentum of India is strong and the government and the regulators are doing a commendable job of ushering in progressive reforms. The Indian markets will continue to grow, with interest from new investors and broadening investment opportunities. It is likely to widen in its reach and offering and evolve as a vibrant, digital market that will receive the sustained interest of foreign and domestic investors over the coming decades.”
