First, through the FPI Regulations, Sebi has sought to simplify and provide uniform entry norms for all types of foreign investors, be it institutional investors (such as mutual funds, pension funds, banks, asset managers, insurance companies, etc) or non-institutional investors (such as individuals, corporates, trusts, family offices, etc), who wish to conduct portfolio investments in Indian listed securities. This will provide a simple and equitable level-playing field for all types of foreign investors, which did not exist previously.
Second, the regulations now allow Domestic Depository Participants (DDPs)typically, banks in India that render custody services to clientsto register (on behalf of Sebi) new applicants who are keen on registering under the FPI Regulations. This delegation of power by Sebi to DDPs, to grant licenses/registrations to applicants should help simplify the overall registration process for foreign investors and reduce the overall processing time that it takes under the current regulations.
Third, Sebi has moved away from the current process of requiring all foreign portfolio investors who wish to invest in Indian securities to comply with uniform KYC norms. To this effect, Sebi has advocated that all FPIs be categorised into three baskets based on their perceived risk-profile, such that
n all government and government-related investors are to be categorised as Category-I FPIs for which minimal KYC requirements need to be fulfilled,
n all regulated entities (e.g., mutual funds, banks, portfolio managers, etc) are to be categorised as Category-II FPIs for which slightly more KYC requirements are to be fulfilled and,
n all unregulated persons/entities (e.g., individuals, corporates, trusts, family offices, etc) are to be categorised as Category-III FPIs, for which comparatively more KYC requirements need to be fulfilled.
This will help resolve some of the concerns that were bring raised by sovereign wealth funds, central banks, and other such foreign investors appropriately regulated in their home jurisdictions, who were finding complying with the current KYC requirements rather onerous.
Fourth, the regulations significantly benefit non-institutional foreign investors, who were previously allowed to invest in the Indian capital markets through the Qualified Foreign Investor (QFI) route, as it seeks to put them on par with FIIs. This allows such QFIs or QFI-like investorswho were previously allowed to only invest in Indian listed equities, mutual fund units, G-Secs/T-Bills, Indian corporate debt and CPsto also, going forward, invest in various additional securities such as exchange traded derivatives, units of collective investment schemes, security receipts, perpetual debt instruments and debt capital instruments, rupee-denominated bonds/ units of infrastructure development funds and IDRs. The regulations have also doubled the investment limit for a single QFI/QFI-like investor in an Indian company from the current 5% of the paid-up capital of the company to 10% and has also more than doubled the overall investment limit for all QFIs and QFI-like investors in an Indian company from the current cap of 10% of the paid-up capital of the company to 24% or the prescribed sector cap by bringing QFIs/QFI-like investors within the purview of the FPI Regulations. Lastly, the regulations also now allow QFIs and QFI-like investors to be able to issue their investment-related instructions directly to their stock brokers in India, as opposed to having them routed through their Qualified Depository Participants in India (which was the regulatory requirement previously), which caused various operational challenges for such investors as it caused time delays in getting their investment orders through.
In summary, the new FPI Regulations are a positive step and seek to harmonise the various routes available to international portfolio investors to access the Indian capital markets by clubbing the current FII window and QFI window into a single FPI window. The success of the new FPI window will depend largely on how the Indian government decides to tax this new category of investors. It is envisaged that FPIs will be taxed on lines that are similar to FIIs, but a notification/clarification to this effect is awaited. If this be the case, it will be a welcome move on the part of the government and the FPI window stands a strong chance of becoming a success.
With inputs from Sudeep Sirkar, associate director, BMR Advisors
The author is partner, BMR Advisors. Views are personal