India’s sovereign debt market, valued at $1.3 trillion, is attracting global investors, but navigating the country’s business landscape can be challenging for outsiders. Foreign investors are rushing to buy bonds before they are added to JPMorgan Chase & Co.’s main emerging market debt index. However, they face obstacles such as lengthy documentation, trade settlement intricacies, and tax complexities.
Unlike China, India has been cautious about hot money flows and has not made concessions like exempting investors from taxes. Accessing the Indian market requires extensive documentation and there are variations in tax treaties depending on the investor’s domicile. Despite these challenges, India has been working to gain access to bond indexes since 2019 to lower funding costs and attract more demand for its bonds.
To trade in the Fully-Accessible Route (FAR) bonds, which are eligible for JPMorgan’s index, foreign funds must undergo a registration process through a custodian for each account. The registration process in India can be burdensome due to paperwork requirements. However, improvements have been made, and global funds have invested around $10 billion in FAR bonds since the announcement of index inclusion.
While there have been operational challenges, the market feedback has been positive, and JPMorgan expects foreign ownership to nearly double in the next year. In terms of taxation, India has agreements with several countries that allow investors to benefit from lower tax rates. However, India’s withholding tax rate is higher compared to other emerging market bond index members.
In contrast, China has exempted foreign institutions from certain taxes on interest income from investments in domestic bond markets. For non-residents with tax treaties with India, the beneficial tax regime under the treaty should apply. Bloomberg Index Services Ltd. will also include some Indian bonds in its emerging market local currency index next year.
Overall, India’s sovereign debt market presents opportunities for global investors but navigating the regulatory and taxation landscape can be complex. Despite the challenges, the interest from foreign investors in Indian bonds remains strong, indicating the market’s potential for growth.