The Securities and Exchange Board of India (Sebi) has received requests from overseas charity and endowment trusts to classify them as Category II foreign portfolio investors (FPIs). Currently, all charity and endowment funds fall under the category III FPIs, who are not eligible to participate in any public issue.
As per Sebi FPI Regulations 2014, charity and endowments funds fall under the definition of broad-based funds, and are not a part of qualified institutional buyers (QIBs). Hence, they are not eligible to participate in any institutional placement such as qualified institutional placement (QIP) or public issues including initial public offering (IPO) or offer for sale (OFS). Further, they are not allowed to subscribe or deal in offshore derivatives instruments directly or indirectly.
According to Rajesh Gandhi, partner at Deloitte Haskins & Sells, the regulator can consider the request based on precedents. “University funds and pension funds are eligible to get a licence under category II although they are unregulated,” Gandhi said.
Market participants said re-classifying charity and endowment funds as category II would also simplify the KYC process for them. “KYC documentation for category III FPI is more stringent as compared to category II. For instance, in the case of Category III, the FPI is required to submit its financial data, proof of identity and address of its senior management as well as proof of identity of its authorised signatories and beneficial owners. Such documentation is not required for applicants under Category II,” Gandhi said.
Charity and endowment funds are formidable part of global institutional funds. As per market participants, these funds constitute about 10-15% of total funds owned by institutions globally. Asset management companies such as Blackrock manage these funds globally.
Sebi had categorised charity funds as broad-based ones as they are not regulated by any government agency or a securities regulator. These funds are owned by large charitable trusts.
Sebi had notified new FPI regulations in January 2014. Prior to this, all overseas funds were regulated by Foreign Institutional Investor (FII) Regulations 1995. As per erstwhile regulations, funds held by endowments, foundations and charitable societies were considered as institutional investors on par with university funds and pension funds though they are not regulated by any authority. So, they were treated as institutional investors for all the primary and secondary market transactions. However, in 2014, the regulator had tweaked the norms for overseas funds and classified those as Category III.
As per the new regulations, category I funds comprise entities with the lowest risk and include foreign governments and government-related foreign investors. Category II FPIs include appropriately-regulated broad-based funds, university funds, and university-related pension funds, among others. Category-III FPIs include others that do not fall under the first two categories.