According to them, India is competing for funds with other emerging markets of Southeast Asia and eastern Europe and, hence, has to offer level-playing fields. Besides, with things having already gone from bad to worse in the Indian markets, special efforts are required to lure investments. Scrapping of capital gains tax, more transparency in accounting standards and speeding up of the demat process were some suggestions made by two FIIs at the Euromoney Conference in New Delhi on Friday.

Arun Mehra, investment analyst at Fidelity Investments Management (HK) Ltd, felt that the capital gains tax levied on FIIs in India needs to be scrapped in tune with the practice in other emerging markets. Currently, domestic institutions in India pay 10 per cent capitalgains tax while FIIs have to pay 20 per cent. ``Although scrapping of the capital gains tax may not see funds flowing into India immediately, it certainly will make the Indian markets more attractive and will be a big incentive for FIIs to look at India,'' says Mehra.

Agrees Robert Gibson, country head of Jardine Fleming India, and adds, ``The Indian government must understand that it has to create conducive conditions to attract FIIs as the latter no longer look at India in isolation.'' According to Gibson, Indian companies need to have more accounting transparency especially for minority shareholders. ``International investors are worried as India is competing with other emerging markets for funds. The accounting standards here need to be lifted. It is also important to look at the behaviour of issuers and promoter groups to check unsatisfactory accounting practices.'' Although Gibson welcomed the takeover code and said it was a step in the right direction, he felt it was not being reviewedproperly.

The government's decision to allow stock-option in a few industries like information technology and pharmaceuticals has also failed to please the FIIs. They strongly object to the 10 per cent cap on the issue of securities under the stock-option scheme. They feel it should be left to the company to decide the number of shares it wants to issue depending on the requirement. Even the pricing of stock options at a discount of 10 per cent to the market price is not in line with the international practice of 15 per cent. Says Mehra, ``I don't see any rationale for these caps.

For instance, how can the government decide the number of stock option securities a company like Infosys should issue keeping in mind its profitability.''

FIIs also feel that moves like banning short sales and introducing buy-back may not have the desired effect on the stock markets as perceived by domestic brokers. Says Gibson, ``Let the market find its own levels.'' He feels the market may not have bottomed out and couldsee a level of 2,800 points. Regarding buy-back, Gibson felt it would not give any major boost to the market. ``The purpose of the buy-back is more important,'' he added.

Defending Sebi's moves to lure FIIs and improve market sentiments, chairman DR Mehta said: ``We have already introduced a number of steps to increase transparency like furnishing unaudited accounts on a quarterly basis and issue of corporate governance.'' Mehta also noted that the takeover code was already under review by the Justice Bhagwati committee. Besides, FIIs have been allowed to have a forward cover for their equity investments and prior approval for their sub-accounts is no longer necessary. Moreover, the FII investment limit has also been hiked from 30 to 40 per cent (with another 10 per cent for NRIs and OCBs).

Need to speed up demat process

Efforts to bring physical deliveries into the dematerialised form have also not gone down too well with FIIs. Foreign investors feel the efforts to increase business in the dematform have so far been lukewarm and urgently need to be speeded up. FIIs say it takes a couple of months to convert the physical delivery into the demat form. Although NSDL managing director CB Bhave agreed that the demat process has been slow, he said the problem arises because even after 60 days the security can be declared as bad delivery and has to be sent back.