This became obvious as foreign investors are eagerly buying bonds before they’re added to JPMorgan Chase & Co.’s main emerging market debt index from Friday.
What are the challenges foreign investors of India's sovereign bonds face?
India’s sovereign bonds are traded and settled on the central bank’s trading platform.
Foreign funds not registered onshore typically place orders through custodian banks, making the process cumbersome, the report read.
Interest income is taxed at 20%, but tax treaties can reduce this rate, the report read.
Despite India’s $1.3 trillion sovereign bond market becoming very attractive for foreign investors, they face a lot of challenges ranging from lengthy documentation to the intricacies of settling a trade and the complexities of paying taxes on any profits, Bloomberg reported. This became obvious as foreign investors are eagerly buying bonds before they’re added to JPMorgan Chase & Co.’s main emerging market debt index from Friday. The stability of the rupee versus the dollar only adds to the appeal of the Indian government bonds, but the red tape makes it hard to invest (Getty Images/iStockphoto)
Also Read: Foreign investors buy $10 billion of Indian govt bonds since JPM inclusion announcement
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India opened a segment of the sovereign bond market to overseas investors only due to record borrowing during the pandemic.
What are the challenges foreign investors of India's sovereign bonds face?
To trade directly in the Fully-Accessible Route (FAR) bonds, which are the types eligible to be added to JPMorgan’s index, foreign funds must complete a registration process for each account via a custodian.
Investors found it frustrating that the documentation required is more complex than in other countries, according to the Bloomberg report, which cited sources who did not wish to be named.
For example, electronic signatures aren’t available for non-residents.
While on-boarding typically takes eight weeks, there have been cases of it taking as little as seven days or as long as two years, the report read.
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Still, global funds bought roughly $10 billion of FAR bonds since index inclusion was announced in September suggesting logistical headaches are not deterring investors, according to the report.
India’s sovereign bonds are traded and settled on the central bank’s trading platform. Foreign funds not registered onshore typically place orders through custodian banks, making the process cumbersome, the report read.
How is India's taxation different from China?
India, cautious of hot money flows that led to the Asian financial crisis, chose not to follow in the footsteps of China, which provided concessions such as exempting investors from taxes ahead of joining major debt indexes.
Also Read: Investors bought ₹27,000 cr of sovereign gold bonds in FY24: RBI report
However, India has agreements with dozens of countries, allowing some investors to benefit from lower rates than the 30% for short-term capital gains and 10% for long-term gains. Interest income is taxed at 20%, but tax treaties can reduce this rate, the report read.
