India to Allow Individual Foreign Investors to Buy Local Shares Directly

India’s government will allow overseas individual investors to directly buy local equities as the country seeks to boost capital inflows and reduce volatility in the stock market.

The new rule from the central bank and stock market regulator is expected to take effect by Jan. 15, the government said in an e-mailed statement today. Currently, individual investors can only invest in Indian shares through so-called participatory notes.

The move has been anticipated since October 2010 when a Finance Ministry official, who declined to be identified at the time, said the change was being considered. R. Gopalan, secretary of economic affairs at the Finance Ministry, confirmed this on Nov. 15.

The new rule will “widen the class of investors, attract more foreign funds, and reduce market volatility,” as well as deepen the Indian capital market, the government said in its statement. Foreign investors (FIINDRGP) pulled out $495.5 million from India’s equities last year, compared with a record inflow of $29.4 billion in 2010, data from the exchange regulator show.

The benchmark BSE India Sensitive Index (SENSEX) dropped 25 percent in 2011 as foreign investors sold shares on concerns that a slowdown in the U.S. and Europe’s debt crisis may erode company profits already threatened by the most aggressive interest-rate increases among major Asian economies.

To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at npearson7@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net.

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