In its bid to encourage and simplify foreign portfolio investments, the Securities and Exchange Board of India (Sebi) recently notified the Sebi (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations), which seek to repeal and replace the existing Sebi (Foreign Institutional Investor) Regulations, 1995 (FII Regulations), and the Qualified Foreign Investor (QFI) framework.
The FPI Regulations are a welcome move as this further simplifies portfolio investment in India. The Regulations merge all the existing Foreign Institutional Investors (FIIs), sub-accounts and the QFIs into a single class of investors known as Foreign Portfolio Investors (FPIs). While the eligibility criteria have been tightened, the process of applying for registration with Sebi has been done away with. FPI registration is now to be obtained from a Designated Depositary Participant (DDP) who shall follow a risk-based model for completion of Know Your Client (KYC) requirements.
Depending on the risk-profile, the FPIs have further been divided into three categories, where Category-I includes government and government related foreign investors, Category-II includes appropriately regulated broad-based funds (BBF) and persons, university funds, pension funds and BBFs that are not appropriately regulated but whose investment managers are regulated and registered as an FPI, and Category-III is the residuary.
The investment avenues available under the FPI regime are mostly in line with the current FII and QFI regime. Total investment by each FPI or an investor group is restricted to 10% of the issued equity capital of the company. Furthermore, where two or more FPIs have the same common beneficial owner (shareholding or voting rights or any other form of control in excess of 50% across the FPIs), the investment by all such FPIs will be clubbed together for the purpose of calculating the investment limit. Absence of clarity on the term ‘control’ is likely to create challenge for the DDPs. Nevertheless, the investment limit of 10% may certainly bring some cheer for a few investor groups like foreign corporate, foreign individuals and QFIs who were otherwise allowed to invest only up to 5% of the total issued capital of a company.
The erstwhile prohibition on issue of Offshore Derivative Instruments (ODIs) by sub-accounts has been removed. Category-I and Category-II FPIs (except unregulated BBFs) are allowed to issue, subscribe or otherwise deal in ODIs directly or indirectly.
On the taxation front, FIIs were governed by a special tax regime which provides for special rates of taxes on income earned by FIIs. Post introduction of