NRI funds, SWFs upgraded to FIIs

Written by Markets Bureau | Mumbai, May 29 | Updated: May 30 2008, 06:39am hrs
The Securities & Exchange Board of India (Sebi) on Thursday unveiled far-reaching amendments to the regulations governing foreign institutional investors (FIIs), widening the definition of FIIs and giving non-resident Indians (NRIs) a broader role in developing the domestic financial market. The regulator also added sovereign wealth funds (SWFs) in the category of FIIs.

With these amendments, applicants for FII registration would now include SWFs, apart from international or multilateral organisations, foreign governmental agencies and overseas central banks. The amendments also allow unregulated university funds, endowments and charitable trusts to become FIIs.

Giving NRI fund managers a major boost, the regulator said an asset management company (AMC), investment manager or advisor or an institutional portfolio manager set up and/or owned NRIs would be eligible to be registered as an FII subject to the condition that they would not invest their proprietary funds. In others words, such entities can act only as asset managers.

This is expected to provide a fillip to such NRI fund management activities, as about 30 proposals involving NRI fund managers are believed to be awaiting the regulators clearance.

In a 16-page notification, Sebi has made amendments to clause 13 of the Sebi (Foreign Institutional Investors) Regulations, 1995. The amended regulations will be called the Sebi (FIIs) (Amendment ) Regulations, 2008.

The foreign institutional investor shall be responsible and liable for all acts of commission and omission of all its sub-accounts and other deeds and things done by such sub-accounts in their capacity as sub-accounts under these regulations, the notification said.

Sebi said the type of securities FII are permitted to invest in has been widened to include schemes floated by a collective investment scheme.

The notification has also incorporated the policy measures adopted on the Offshore Derivative Instruments (Participatory Notes) and all the changes made for the registration of FIIs last year. The market regulator had earlier proposed a slew of changes to the norms governing ODIs and participatory notes and had put curbs on the role of FIIs in issuing PNs.

Specifying further the definition of a sub-account, Sebi said a sub-account means any person resident outside India, on whose behalf investments are proposed to be made in India by an FII and who is registered as a sub-account under these regulations.

These regulations will come into force on the date of their publication in the Official Gazette.

The amendments also include within their ambit sovereign wealth funds specifically, by insering them in regulation 6, clause d.

Defining who constitutes a foreign individual, the regulations say such individuals will have to fulfill the conditions of having a net worth of not less than $50 million, hold the passport of a foreign country for at least five years preceding the date of application. It also says the individual should hold a certificate of good standing from a bank and should be a client of the FII or any other entity which belongs to the same group as the FII for at least three years preceding the date of application.

Debt market to see more exposure

The finance ministry has doubled the headroom for foreign institutional investors (FIIs) in the debt market. This will substantially ease the over dependence on stock market exposure of foreign entities in the Indian capital markets. The changes are expected to add volume to the corporate & government debt market, where the daily turnover is less than Rs 700 crore compared with the Rs 20,000 crore in equity markets.

The investment limit in the government securities market for FIIs has been raised to $5 billion from $3.2 billion, while their exposure in the corporate bonds segment has been doubled to $3 billion.

It is expected that the government will now do away with the ceilings altogether.

The government has so far restricted the penetration of FIIs into the debt market as it raises the total external debt of the economy.

This has been a legacy of the balance of payments crisis of 1990-91, despite the massive subsequent rise in foreign exchange reserves. Market players have complained that the lack of volumes has discouraged domestic companies from raising more debt, relying instead on equity.

The move has been recommended by most reports on the financial sector, including the Percy Mistry committee and the more recent Raghuram Rajan committee, which have both said it would allow for the raising of funds at competitive rates.

Analysts also note that greater FII participation in the debt market would provide help link domestic interest rates to international rates.