The new regulations, which have come into effect today, replaces the existing Sebi regulations for Foreign Institutional Investors (FIIs) and the new class of investors, FPIs, would encompass all FIIs, their sub-accounts and Qualified Foreign Investors (QFIs).
Under the new norms, FPIs have been divided into three categories as per their risk profile and the KYC (Know Your Client) requirements and other registration procedures would be much simpler for FPIs compared to current practices.
The Securities and Exchange Board of India (Sebi) has also decided to grant them a permanent registration, as against the current practice of granting approvals for one year or five years to the overseas entities seeking to invest in Indian markets.
They will be permanent unless suspended or cancelled by the Board or surrendered by the FPI.
Sebi said that FPIs would need to apply for registration through Designated Depository Participants (DDPs), subject to compliance with KYC norms.
"The designated depository participant shall endeavor to dispose of the application for grant of certificate of registration as soon as possible but not later than 30 days after receipt of application by the designated depository participant," Sebi said.
Sebi has also issued instructions regarding risk-based KYC for FPIs, as per their risk categories.
The Category I FPIs, which would be the lowest risk entities, would include foreign governments and government related foreign investors.
Category II FPIs would include appropriately regulated broad based funds, appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds,university related endowments, pension funds etc.
The Category III FPIs would include all others not eligible under the first two categories.
Sebi said that all existing FIIs and Sub Accounts may continue to buy, sell or otherwise deal in securities under the FPI regime.
All existing QFIs can also 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.
The registration granted to FPIs by the DDPs on behalf of Sebi would be permanent unless suspended or cancelled by the regulator.
FPIs will be allowed to invest in all those securities, wherein FIIs are allowed to invest.
Sebi also said 'Category I' and 'Category II' FPIs will be allowed to issue, or otherwise deal in offshore derivative instruments (ODIs), directly or indirectly.
However, 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 KYC norms.
Sebi-registered custodian of securities will be deemed to be DDP subject to payment of fees as prescribed in the regulations.
Regulator-approved Qualified Depository Participant who are not meeting the DDP eligibility criteria may operate as DDP for a period of one year, Sebi said.
Sebi would not charge any fees for granting registration to Category I foreign investors, while the regulator would take an annual payment of USD 3,000 and USD 300 from Category II and Category III overseas entities, respectively, till the validity of their registration.
Also, fees of USD 1,000 would be paid by the existing FIIs, sub-accounts and QFIs to obtain registration certificate to act as an FPI.
However, Sebi would not charge any fee from multilateral agency such as World Bank and other institutions, established outside India for providing aid, which have been granted privileges and immunities from payment of tax and duties by the central government to obtain registration certificate to act as an FPI.
FPIs would be allowed to invest in securities in the primary and secondary markets.
These would include unit of schemes floated by domestic mutual funds, treasury bills, dated government securities, equity derivatives, commercial papers, and Indian Depository Receipts, among others.
The FPIs would also need to obtain separate and distinct Permanent Account Number (PAN) from the Income Tax Department.
These measures come at a time when concerns are being raised about outflows of foreign capital and weakening of the rupee against the dollar and other foreign currencies.
The new norms are expected to make it much easier for the foreign investors to enter the country and make investment decisions.
To ring-fence the new regulations from possible misuse, the FPIs would need to be from countries that are member of global bodies like Financial Action Task Force (FATF), IOSCO (International Organisation of Securities Commissions).
Besides, the entities from any country against which bodies like FATF have issued warning for AML/CFT (Anti Money Laundering and Combating the Financing of Terrorism) deficiencies would not be allowed to register as FPIs.