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Foreign investors face the dual challenges of accessing the Indian market in the appropriate manner and finding suitable asset management capability. The second challenge is actually fairly easily met, since there is a good supply of high quality managers operating in India, many of whom have offices in other parts of Asia and in Europe.

The challenge of how to access Indian investments needs more careful assessment. Currently, a pension fund incorporated outside India can invest in the Indian securities market by registering itself as a Foreign Institutional Investor ("FII") or a sub-account of an FII under the Securities and Exchange Board of India (SEBI) (Foreign Institutional Investors) Regulations, 1995.

According to Vikrant Gugnani, CEO of Reliance Mutual Fund in Mumbai, "From the regulatory aspect, investing in India via the FII route is the most clearly defined route through which a pension fund can have access to the Indian capital markets."

An FII is defined to include a pension fund, a mutual fund, an investment trust, an insurance company or a reinsurance company, which proposes to invest in India. To register as an FII, a pension fund has to apply to the SEBI. A pension fund can also be registered as a sub-account. Akil Hirani, managing partner of lawyers Majmudar & Co, explains, "An FII sub-account is a vehicle available to investors that want to participate in the Indian securities markets on a smaller scale and who do not want to undergo the regulatory scrutiny as an FII. To register a pension fund as its sub-account, an FII has to make an application to the SEBI along with a registration fee of US$1,000 (€780). The sub-account and the FII also have to furnish a joint undertaking. After considering the eligibility requirements for a sub-account under the FII Regulations, which are similar to those applicable to an FII, the SEBI may register the pension fund as a sub-account. A sub-account holder can avail of all the tax and other benefits available to FIIs."

The alternative route available to Foreign Institutions to access the Indian capital markets is through Participatory Notes (known as P Notes). Participatory Notes are simple derivative instruments that foreign investors not registered with SEBI use to trade in Indian markets. Investors place their order through brokerage houses that have offshore-based FII accounts. The brokerage houses then repatriate the dividends and capital gains. In this case, the broker acts like an exchange; it executes the trade and uses its internal accounts to settle the trade. The broker keeps the investor's identity anonymous and this is one of the reasons SEBI, of late, has put this route under scrutiny.

The favourable market conditions and the more accommodating regulatory environment is allowing Indian asset managers to work more actively with foreign firms and pension funds registered as FIIs in India. The asset managers act as sub advisers to FIIs and provide guidance on broad investment options including private equity and real estate. An example is the Kotak Group, which has established a London office, Kotak Mahindra UK, to handle managed accounts for institutions able to invest over $15m in Indian equities. As well as offering access to India through its FII umbrella, Kotak has a range of offshore funds, including an India-dedicated Sharia fund, various private equity and real estate funds. It is just one of
several groups, including Reliance, Birla Sun Life, ICICI Bank, SBI Funds and HSBC actively marketing to global institutions.

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