FII regulations prescribed by SEBI and QFI framework prescribed by both SEBI and RBI would be required to be repealed and replaced by a new framework for FPIs; amendments in FEMA and SEBI (ICDR) Regulations

Driven by the rationale of having an integrated policy on foreign investments, SEBI vide Press Release (PR No. 99/2013) on 5 October, 2013 conveyed the approval of draft SEBI (Foreign Portfolio Investors) Regulations, 2013 (the draft Regulations) in the Board meeting of SEBI. The draft Regulations intend to merge all the existing FIIs, sub accounts and qualified foreign investors (QFIs) into a new investor class termed as “Foreign Portfolio Investor” (FPI). FPIs will be allowed to invest in all those securities, wherein foreign institutional investors (FIIs) are allowed to invest.

In his Union Budget Speech for 2013-14, P Chidambaram, the Finance Minister, quoted “There are many categories of foreign portfolio investors such as FIIs, sub-accounts, QFIs etc. and there are also different avenues and procedures for them. Designated depository participants, authorised by SEBI, will now be free to register different classes of portfolio investors, subject to compliance with KYC guidelines

SEBI will simplify the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors. SEBI will converge the different KYC norms and adopt a risk-based approach to KYC to make it easier for foreign investors such as central banks, sovereign wealth funds, university funds, pension funds etc. to invest in India”

The base of the draft Regulations has been (Foreign Institutional Investors) Regulations, 1995, QFIs framework and the recommendations of the “Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments” (the Committee Report) dated 12 June, 2013.

Authorised dealer category-I authorised by Reserve Bank of India, depository participant and custodians registered with SEBI shall be authorised to as designated depository participants (DDPs). DDPs shall register FPIs on behalf of SEBI subject to compliance with KYC requirements. The registration certificate shall be permanent in nature unless it is suspended or cancelled by SEBI.

Though there is an integration of portfolio investors in to a single category called FPI’s, from KYC point of view, the Committee recommended for catergorisation of FPIs based on the perceived risk profile. Subsequently, SEBI vide CIR/MIRSD/07/2013, dated September 12, 2013 issued circular specifying KYC requirements for these categories:

Category I:       Government and government related foreign investors such as foreign central banks, governmental agencies, sovereign wealth funds, international/ multilateral organisations/ agencies.

Category II:      Appropriately regulated broad based funds such as mutual funds, investment trusts, insurance/reinsurance companies, other broad based funds etc.; Appropriately regulated entities such as banks, asset management companies, investment managers/ advisors, portfolio managers etc; broad based funds whose investment manager is appropriately regulated; university funds and pension funds; university related endowments already registered with SEBI as FII/sub account.

Category III:  All other eligible foreign investors investing in India under PIS route not eligible under Category I and II such as endowments, charitable societies/ trust, foundations, corporate bodies, trusts, individuals, family offices etc.

All the FIIs and sub accounts may continue to buy, sell or otherwise deal in securities under the FPI regime. QFIs may continue to buy, sell or otherwise deal in securities till the period of one year from the date of notification of this regulation. In the meantime, they may obtain FPI registration through DDPs. Category I and category II FPIs will be allowed to issue, or otherwise deal in   offshore derivative instruments (ODIs), directly or indirectly. However, the FPI needs to be satisfied that such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority after ensuring compliance with ‘know your client’ norms.

The Committee report cited required amendments/ modifications that would be needed in the legal framework viz. FII regulations prescribed by SEBI and QFI framework prescribed by SEBI and the RBI would be required to be repealed and replaced by a new framework for FPIs; amendments in FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, SEBI (ICDR) Regulations, 2009 etc.

In view of the same, one may expect series of amendments coming in near future, along with issue of SEBI (Foreign Portfolio Investors) Regulations, 2013.

(Both Vinita Nair and Pooja Rawal are practicing company secretaries at Vinod Kothari & Co, and can be contacted at [email protected] and [email protected], respectively)