FIIS, SUB ACCOUNTS AND QFIS CLUBBED TOGETHER AS FOREIGN PORTFOLIO INVESTORS

To simplify the procedure for investment by portfolio investors in India, the Securities and Exchange Board of India (“SEBI”) has notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”) which has since merged existing Foreign Institutional Investors (“FIIs”), sub accounts and Qualified Foreign Investors (“QFIs”) into a new class of investors, termed as Foreign Portfolio Investors (“FPIs”) and has repealed the SEBI (FII) Regulations, 1995 (“FII Regulations”). The FPI Regulations will however come into force from June 1, 2014, until then the FII Regulations will continue to remain in force.

Under the FPI Regulations, FPIs can invest in permitted securities in India after registering itself with the designated depository participant (“DDP”) as opposed to the earlier requirement of seeking a SEBI registration by FIIs and other long term investors. All existing FIIs and sub accounts shall be deemed to be an FPI till the expiry of the block of 3 (Three) years for which fees have been paid as per the FII Regulations.

The salient features of the FPI regime as provided under the FPI Regulations are as under:
  • Categories of FPIs:
    • Category-I includes entities with the lowest risk, such as foreign governments and government-related foreign investors;
    • Category-II includes appropriately regulated broad-based funds, university funds, university-related endowments and pension funds, among others; and
    • Category-III includes all others not eligible under the first two categories such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
  • Eligibility criteria of FPIs: To be registered as an FPI, the applicant shall inter alia satisfy the following eligibility criteria:
    • it must be a person not resident in India;
    • it must be a resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission's Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with SEBI;
    • if the applicant is a bank, it must be a resident of a country whose central bank is a member of Bank for International Settlements; and/or
    • it must be resident in a country identified in the public statement of Financial Action Task Force as a jurisdiction having strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply.
  • Eligible Investment Instruments: The permitted securities for FPI investment consist inter alia of listed or to be listed shares, debentures and warrants of Indian companies in the primary and secondary markets, units of mutual funds, commercial papers of companies, listed or unlisted debentures of infrastructure companies, treasury bills and dated government securities and other instruments as permitted under the erstwhile FII regime.
  • Investment Conditions:
    • Any unlisted share held by FIIs and sub accounts prior to notification of the FPI Regulations shall be subject to the lock-in period as is applicable under the extant Foreign Direct Investment Policy.
    • All FPIs must hold securities only in dematerialized form except for the securities already held by the FPIs prior to the FPI Regulations coming into force.
    • Unless otherwise specified by SEBI, all such securities shall be registered in the name of the FPI being the beneficial owner thereof under the Depositories Act, 1996;
    • No FPI can invest more than or equal to 10% (Ten Percent) of the total issued share capital of any company.

Consequent to the above, the RBI has amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, to give effect to the FPI Regulations.