SEBI has issued a new set of regulations governing institutional and non-institutional foreign investors investing in the Indian capital market, bringing them under the collective umbrella of “foreign portfolio investors”. The new FPI rules are based on the Chandrasekhar Committee’s recommendations for simplifying and unifying the entry norms for all types of foreign investors who wish to invest in listed Indian securities.

Rollout of the FPI regulations will cancel the existing FII regulations (applicable to institutional investors, such as mutual funds, pension funds, banks and insurance companies), as well as the Qualified Foreign Investor (QFI) regulations (for non-institutional investors such as individuals, corporates, trusts and family offices). These rules can come in to force only after amendments are made to Indian exchange control regulations. Through the FPI regulations, FII and QFI windows will be merged into a single investment window that will apply uniformly to both types of foreign investors. FPIs have been segregated into three categories under the new regulations, based on their perceived risk profile.

Government and government-related investors fall under Category-I, regulated entities like mutual funds, banks and portfolio managers under Category-II and unregulated persons or entities such as individuals, corporates and trusts under Category-III. Based on risk, these categories will entail progressively more stringent KYC norms.

But apart from KYC, the categorisation does not significantly impact FPIs. Licencing and registration of FPIs will be done by domestic depository participants on behalf of SEBI, thereby simplifying the process and reducing the time taken. FPIs can invest in the same types securities that FIIs are currently allowed to, including listed equities, mutual fund units, G-Secs/T-Bills, corporate debt and Indian depository receipts. The investment limits applicable to FIIs will remain in force. But the regulations do not allow FPIs to invest in unlisted securities, as was permitted under the earlier rules.

SEBI has introduced minor changes in the new rules, such as the definition of a “broad-based fund” and how investment limits are to be monitored by FIIs at an “investor group level”.

This is not intended to bring about any change in SEBI’s policy with respect to the spirit in which such terms ought to be interpreted, but rather articulate the market regulator’s views on the subject. As regards as the offshore derivatives (ODIs) business of FIIs, SEBI has maintained the restrictions on FIIs issuing ODIs to unregulated entities.

In addition, SEBI has prohibited FPIs from issuing ODIs to broad-based funds that are unregulated, but whose investment managers are regulated, which was previously allowed. The good news is that SEBI has excluded ODIs issued earlier by FIIs from the ambit of the new regulations.

The new rules significantly benefit non-institutional foreign investors, who were previously barred from direct investment in listed securities, putting them on par with FIIs. QFIs are now allowed to invest in various additional securities such as derivatives and IDRs.

SEBI has doubled the investment limit for a single QFI in an Indian company from the current 5 per cent of paid-up capital of the company to 10 per cent. It has also doubled the investment limit for multiple QFIs in a company from the current 10 per cent of paid-up capital to 24 per cent or the prescribed sector cap.

Furthermore, QFIs will now be able to issue investment instructions directly to their stockbrokers, as opposed to the previous time-consuming practice of routing them through qualified depository participants.

The CBDT recently notified that FPIs will be considered as FIIs for Indian tax purposes. As such, FPIs will be eligible for the same concessional tax rates afforded to FIIs and sub-accounts in India.

(The writer is a Partner with BMR Advisors. He was assisted by Sudeep Sirkar, Associate Director)

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