Fine-tuning foreign portfolio investment norms

Jan 25 2014, 03:09 IST
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SummaryThe success of the new FPI regulations will depend largely on the tax treatment

The Securities and Exchange Board of India (Sebi) has recently issued a new set of regulations, called the FPI Regulations, that will govern all foreign investors (be it institutional or non-institutional) who invest or propose to invest in the Indian capital markets. These regulations will benefit such investors, as it allows for an easier and simpler regulatory regime. In this column, we have sought to discuss some of the key benefits in greater detail.

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 clients—to 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

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