Insights
SEBI FPI regulations review
May 1, 2019The Securities and Exchange Board of India (SEBI) released the report of a working group on Foreign Portfolio Investment (FPI) regulations for public comments on 24 May 2019.
The working group was mandated to revamp and redraft the SEBI (FPI) Regulations 2014 to incorporate various circulars, FAQs and operational guidelines issued over the last four years and to simplify, rationalise and liberalise the Regulations. The Report discusses and makes recommendations on the FPI Registration Process, KYC and simplification of documentation, investment permissions amongst other aspects. Basis the recommendations, proposed SEBI (FPI) Regulations and proposed Operating Guidelines were also prepared as part of the Report.
Key recommendations on FPI Registration
- Fast track registration and simplification of documentation for certain Category II FPIs such as public retail funds coming from FATF member countries, applicants seeking registration as non-investing FPIs from FATF member countries, applicants seeking to invest only in G-Secs or only through VRR;
- Pension Fund to be treated as category I FPI;
- Review of broad-based condition for appropriately regulated entities;
- Deemed broad based status for insurance and reinsurance entities;
- Entities majorly owned by investors eligible for Category I FPI registration shall be deemed as Category I FPI;
- Broad based funds will include entities set up as collective investment vehicles;
- Broad basing should be on basis of economic ownership interest, either by way of holding units/shares or other instruments. A minimum shareholding criteria of 25% to justify broad based status on basis of underlying funds;
- Separate registration for each sub-fund/share class having a segregated portfolio investing in India;
- Simplified registration for multiple investment manager (MIM) structures;
- Removal of “opaque structure” definition.
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Key recommendations on Investment Restrictions
- FPIs may invest up to the applicable sectoral cap on an aggregate basis after adjusting for investments made directly or indirectly under the FDI route. Indian companies may be allowed to reduce the aggregate limit to 24%, 49% or 74% as they deem fit, subject to Board and Shareholder approval;
- FPIs should not be prohibited from investing in sectors that are prohibited for FDI. However their existing investments, including ADRs and GDRs, should not exceed 49%;
- Sovereign Wealth Funds should be exempted from investment limit restrictions on corporate bonds, under SEBI and RBI Circular dated 15 June 2018;
- FPIs should be permitted to acquire “to be listed” securities only in case of IPO, including an offer for sale of specified securities;
- Strengthening of clubbing restrictions : Investor group should consist of all associate entities of FPI who are investing in Indian securities and identified on basis of common ownership of more than 50% or common control. FPIs shall ensure that the holding of all their group entities in shares of a company are below 10%. If this limit is breached, either all entities of the investor group are re-categorised as FDI or divestment is made within 5 trading days from date of settlement of the trades causing breach.
Other recommendations
- FPIs should be permitted off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic investor;
- Detailed process and guidelines to operationalise the provision of classifying FPI acquisition of more than 10% as FDI;
- Offshore Funds floated by Indian mutual funds can invest in India only after seeking registration as FPI;
- The limit of 25% holding in a category II AIF shall be on the “investor group”;
- Investment by FPIs in AIF (having Indian Investment Manager) shall be reckoned as domestic investment. By virtue of this, FPIs can avoid their investment being reckoned in the sectoral cap;
- Entities established in international financial services centre (IFSC) will be deemed to have met the jurisdiction criteria for FPIs.
Based on the Report of the working group, SEBI approved certain amendments to the FPI Regulations in its Board meeting on 21 August 2019. These include, removing the broad based eligibility criteria for FIIs, re-categorization of FPIs into two categories instead of three, central banks that are not members of the Bank for International Settlement are eligible for FPI registration, entities established in IFSC will be deemed to have met the jurisdiction criteria for FPIs. Further, it also approved the simplification of KYC documentation, off market transfer of unlisted, suspended or illiquid securities to domestic or foreign investors by FPIs. Offshore funds floated by Mutual Funds have been permitted to invest in India post registration as FPI. The issuance and subscription of Offshore Derivative Instruments has also been rationalised.
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SAM & Co comment
The progressive approach taken by SEBI in terms of inviting recommendations from a working group to review the FPI regulations and thereafter acting on such recommendations is welcome and much appreciated. The key focus of such working group to simplify and liberalise the registration and KYC norms was a much needed change that has been approved by the SEBI. While the consequent amendments to the FPI regulations are awaited, we believe that such reforms to the FPI Regulations would only further the interest of and attract foreign investors.
