Why Indian Government allowing Direct Foreign Individual Investing in stocks could be a Bad Idea for Both

The Indian government is set to allow direct investment in stocks by foreign individuals.This is supposed to boost the dollar inflow into the Indian economy at a time when the ruppee has depreciated by more than 20% in 2011 and the BOP situation quite dismal.However it may not be such a good idea for both entities as

1) Indian government could face more volatility in the foreign exchange area as individuals can withdraw money from the Indian market as fast as the FIIs during times of distress

Government lets foreign individuals invest in stock markets

India will allow individual foreign investors direct access to its stock market from January 15, the government said on Sunday, the latest step to liberalise Asia’s third-largest economy after a year of big losses on the benchmark Sensex index.

Previously, foreign nationals were limited to investing in India’s equity market through indirect routes such as mutual funds, or through institutional vehicles.

“The central government has decided to allow qualified foreign investors to directly invest in (the) Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility,” the government said in a statement.Foreign fund inflows, a major driver of Indian stocks, dried up with net outflows of about $380 million as of Wednesday, a far cry from record inflows of more than $29 billion in 2010 that had powered a 17 per cent rise in the benchmark index, following an 81 per cent surge in 2009.

For Foreign individuals

a) The idea may be bad as well as Indian stock markets are a quagmire of bad corporate governance and corruption.Insider trading and manipulation is quite rampant which has made retail investors flee the market.

b) They will be faced with foreign exchange volatility which can be quite high.In dollar terms the Indian market fell by almost 35% in 2011.

c) Some sectors are notorious for corruption with even professional fund managers avoiding real estate because of accounting shenanigans and indian small cap stocks being like casino games rather than companies

d) Note even big money managers like Goldman,GMO have become vicitims of fly by night operations.How will individuals manage to make money and avoid such frauds is highly questionable?