In a move to facilitate portfolio investments in India, recently, the Securities and Exchange Board of India, ("SEBI") notified the SEBI (Foreign Portfolio Investors) Regulations 2014 ("FPI Regulations"), which repeals the SEBI (Foreign Institutional Investors) Regulations 1995 ("FII Regulations") and the framework in relation to qualified foreign investors ("QFIs"). The FPI Regulations...
In a move to facilitate portfolio investments in India, recently, the Securities and Exchange Board of India, ("SEBI") notified the SEBI (Foreign Portfolio Investors) Regulations 2014 ("FPI Regulations"), which repeals the SEBI (Foreign Institutional Investors) Regulations 1995 ("FII Regulations") and the framework in relation to qualified foreign investors ("QFIs").
The FPI Regulations have introduced a new class of investors called the foreign portfolio investors ("FPIs") which encompass foreign institutional investors ("FIIs"), sub-accounts as well as QFIs and provided for simplified and uniform entry norms for FPIs.
FPIs And Categories Of FPIs
The FPI Regulations define an FPI to mean a person who satisfies the eligibility criteria stipulated under the FPI Regulations and has been registered under the FPI Regulations, and shall be deemed to be an intermediary under the SEBI Act 1992. Under the FPI Regulations, the FPIs have been divided into three categories. It is pertinent to note that this categorisation impacts the know your client ("KYC") requirements of the FPIs. Category I FPIs include government and government-related investors such as central banks, governmental agencies, sovereign wealth funds, international or multilateral organisations or agencies, etc. Category II FPIs include appropriately regulated broad-based funds, appropriately regulated entities, broad-based funds whose investment managers are appropriately regulated, university funds, university-related endowments, pension funds etc. Category III FPIs would include all others not eligible under the first two categories.
As regards "broad-based funds", SEBI has introduced certain minor changes in the definition of the same. While under the FII Regulations, if the broad-based fund had institutional investors, it was not required for the fund to have twenty investors. Now this exception has been done away with, thereby requiring the fund with institutional investors to have at least twenty investors even when the broad-based fund has institutional investors.
Registration Of FPIs And Conversion Into FPIs
Under the FPI Regulations, the designated depository participants ("DDPs") have been assigned to undertake the licensing and registration of FPIs, thereby easing the registration process.
Existing SEBI registered custodian of securities and qualified depository participants which have been granted approval from SEBI for registering QFIs are deemed to have been granted approval as DDPs subject to payment of fees as stipulated under the FPI Regulations. Subsequent to notifying the FPI Regulations, SEBI has also issued operating guidelines for DDPs to facilitate the process of registration of FPIs.
Registration once granted to FPIs is permanent unless suspended or cancelled by SEBI or surrendered by the FPI. The eligibility criteria for availing registration under the FPI Regulations are a mixture of requirements under the FII Regulations and the QFI. Notably, non-resident Indians ("NRIs") are restricted from applying under the FPI route. Neither the FII Regulations nor the QFI framework specified that NRIs are not eligible to apply under the respective routes.
An existing FII or sub-account shall be deemed to be an FPI till the expiry of the block of three years for which FII or sub-account has paid fees as per the FII Regulations. However, in order to buy, sell or deal in securities under the FPI Regulations, FII or sub-account shall be required to pay conversion fees to SEBI on or before the expiry of its registration as an FII.
Existing QFIs may continue to buy, sell or deal in securities for a period of one year from the commencement of the FPI Regulations, without requiring payment of any conversion fees, post which QFIs shall be required to register under the FPI Regulations.
Investment Restrictions
The investment restrictions stipulated under the FPI Regulations are more or less similar to those provided under the FII Regulations. Under the FII Regulations, FIIs were allowed to invest in unlisted securities along with listed or to be listed securities, though vide subsequent SEBI circulars, FIIs have been permitted to invest in unlisted securities in the infrastructure sector in addition to listed securities. Now, under the FPI Regulations, the word 'unlisted' is not present under the permissible investment in securities; however, it is specified that FPIs are allowed to invest into listed and unlisted non- convertible debentures or bonds issued in the infrastructure sector and in rupee denominated credit enhanced bonds which are not required to be listed.
SEBI now requires the total investment in equity shares of a company by an FPI or an investor group to be below 10% as opposed to a cap of 10% stipulated under the FII Regulations.
The permissible investments stipulated under the FPI Regulations are a boost to non-institutional investors as they can now invest in additional securities such as derivative instruments, Indian depository receipts, etc.
Offshore Derivative Instruments
The FPI Regulations have brought in certain comprehensive changes as regards offshore derivative instruments are concerned. There has been no change in the definition of the term 'offshore derivative instruments' ("ODIs"); and it has been defined to mean an instrument issued overseas by an FPI against securities held by it that are listed or proposed to be listed on any recognised stock exchange in India, as its underlying. As regards conditions for issuance of ODIs, the FPI Regulations states that no FPI may issue, subscribe or deal in ODIs, unless such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority and after compliance with the KYC norms.
The expression "person regulated by an appropriate foreign regulatory authority" under Regulation 22(1)(a) which was defined under the FII Regulations (entities i.e. regulated either by central bank or securities or future regulator or broad-based fund or portfolio etc.) has not been defined under the FPI Regulations.
Therefore, the FPI Regulations have not explained or clarified as to what regulated entities amounts to, just that the ODIs are to be issued to persons that are regulated by an appropriate foreign regulator.
Notably, unregulated broad-based funds, classified as Category II FPIs, by virtue of their investment manager being appropriately regulated, shall not issue, subscribe or otherwise deal in ODIs directly or indirectly. The restriction applies to all Category III FPIs.
It is also pertinent to note the status of the ODIs that are held by existing FIIs and sub-accounts, which fall under Category III of FPIs or are unregulated broad-based funds under Category II. The FPI Regulations clarify that any ODIs issued under the FII Regulations, before commencement of the FPI Regulations shall be deemed to have been issued under the corresponding provision of these regulations. Considering that the new norms are prospective in effect and that on the basis of the deeming provisions, the ODIs issued, subscribed or held by existing FIIs (which fall into Category III of FPIs or are unregulated broad-based funds under Category II) will not get affected by the restriction applicable to Category II and Category III FPIs.
Repeals And Savings Under The FPI Regulations
The FPI Regulations clarify that anything done under the repealed FII Regulations and the QFI framework shall be deemed to have done under the corresponding provisions of the FPI Regulations. Likewise, further clarifications may be issued by SEBI in this regard.
Applications for grant of certificate as FIIs or sub-accounts, that are pending before SEBI are to be dealt in accordance with the provisions of FII Regulations. Given that operational guidelines in relation to DDPs have come out recently, SEBI may continue to grant certificate of registration as FII or sub-accounts under the FII Regulations, till 31st March 2014, which may extend up to 30th June 2014.
Taxation Of FPIs
The Central Board of Direct Taxes vide notification dated 21st January 2014 has clarified that all the three categories of FPIs would be given similar tax treatment as was being provided to FIIs under the Income Tax Act, 1961.
Given that the FPI Regulations have sought to rationalise various routes of portfolio investments, including institutional as well as non-institutional foreign investment, it will certainly enhance foreign portfolio investments in India. By harmonising and aligning the routes, SEBI has paved way to the foreign portfolio investors in India.
Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.