FPI REGULATIONS NOTIFIED | SIGNIFICANT SHIFT FROM FII REGULATIONS
The Securities
and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014
(“FPI
Regulations”) recently published and thus repealed the Securities and
Exchange Board of India (Foreign Institutional Investors) Regulations, 1995
(“FII Regulations”). FPI Regulations have been drafted following
various recommendations of the K.M. Chandrasekhar Committee (“Committee”).
Please click here
to see our update on the recommendations made by the Committee.
This legal update
will highlight the significant changes that have been brought about by FPI
Regulations from the erstwhile FII regime.
SIGNIFICANT
SHIFTS
New merged
category of Foreign Portfolio Investment: Foreign
Institutional Investors (“FII”), its sub-account and Qualified
Institutional Investors (“QFI”) have been merged into a new investor
class, i.e. ‘Foreign Portfolio Investors’ (“FPI”).
Single window
clearance - DDPs: FPI’s will not be required to get a registration
from SEBI or the Qualified Depository Participants (“QDP(s)”). All
FPI’s will now get a single window clearance from the Designated Depository
Participants (“DDP(s)”) authorized by SEBI which will register FPIs on
behalf of SEBI. However, FII’s and sub-accounts can continue to trade on the
old certificates until they expire or they procure a registration under the
FPI Regulations, whichever is earlier.
Categories of
FPI’s: FPI Regulations divide the FPI’s into three categories, i.e. Category
1, Category 2 and Category 3.
Category 1 FPI includes government and government-related
investors such as central banks, Governmental agencies, sovereign wealth
funds or international and multilateral organizations or agencies.
Category 2 FPI includes appropriately regulated broad
based funds,, appropriately regulated persons, broad-based funds that
are not appropriately regulated, university funds and pension funds and
university related endowments already registered with SEBI as FIIs or
sub-accounts.
Category 3 FPI includes all
others not eligible under Category I and II foreign portfolio investors such
as endowments, charitable societies, charitable trusts, foundations, corporate
bodies, trusts, individuals and family offices.
Broad based
criterion: The meaning of ‘broad based fund’ has been modified
in the FPI Regulations as compared to the FII Regulations. Under FII
Regulations, ‘broad based fund’ was a fund established or incorporated
outside India which has at least 20 investors with no investor holding more
than 49% of the shares or units of the fund. However, there was an exception
that if a ‘broad based fund’ had any institutional investor, then the fund
was not required to have 20 investors. Further, any institutional investor
holding more than 49% of the shares or units of the fund would have to itself
satisfy the broad based criteria. FPI Regulations have made 2 changes in the
meaning:
20
investors at all times: A broad based fund will at all
times require to have 20 investors even if there is an institutional
investor; and
Underlying
investors to be considered while computing number of investors:
The FPI Regulations state that underlying investors (i.e. investors of entities
that are set up for the sole purpose of pooling funds and making investments)
should be counted alongwith the direct investors while computing the number
of investors in a fund.
Investment
Restrictions: The main
changes in the investment limits brought about by the FPI Regulations
vis-a-vis the FII Regulations are as follows:
Issuance of
Offshore Derivative Instruments: Under
the FPI Regulations only Category I FPIs and Category II FPIs (except for
unregulated broad based funds) can issue, subscribe to or otherwise deal in
offshore derivative instruments (“ODI(s)”) directly or indirectly
subject to the following conditions:
ODIs
are issued only to persons regulated by an appropriate foreign regulatory
authority;
ODIs
are issued after compliance with ‘know your client’ norms.
The
key differences between compared to FII Regulations are:
Under
the FII Regulations, all FII, other than the sub-accounts could deal in
ODI’s. Under FPI Regulations only Category I FPIs and Category II FPIs
(except for unregulated broad based funds) can deal in ODI’s;
Under
FPI Regulations, broad-based unregulated funds advised by regulated entities
would not be able to invest in ODI’s, which was permitted under the FII
Regulations;
Under
FPI Regulations, entities that qualify as regulated broad based sub accounts
may also issue ODIs under the FPI Regulations, which was not permitted under
the FII Regulations.
Responsibilities
of DDPs: Alongwith a plethora of obligations, DDPs have also been made
responsible for carrying out KYC due diligence and other necessary due diligence,
checking if the structure of the applicant is
‘opaque’, opening dematerialised accounts only after checking compliance of
the applicant with all the requirements under Prevention of Money Laundering
Act, 2002 and rules and regulations prescribed thereunder, Financial Action
Task Force standards and circulars issued by SEBI in this regard etc.
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MHCO COMMENTS
Inspite of oral promises, nothing has been provided
in the FPI Regulations to suggest that all categories of FPIs would be
treated as FIIs for the purpose of the Income Tax Act, 1961. We hope that
SEBI will work on this with the Central Board of Direct Taxes and clarify on
this pertinent issue as it has already resulted in the failure of the QFI
norms.
Further, the responsibilities cast upon the DDPs,
particularly to conduct a KYC due diligence, may be too burdensome for DDPs
and may deter persons, firms, companies from taking up this role. Also,
disabling broad based unregulated funds advised by regulated entities may
ring a death knell as a large number of investors will not be able to deal in
ODI’s, especially the hedge funds.
(The views expressed in this
update are personal and should not be construed as any legal advice. Please
contact us directly on +91 22 40565252 or contact@mhcolaw.com for any
assistance)
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