India grants UAE investment licence with easier norms on compliance

Category-I licence implies lower compliance burden and investment restrictions, simplified KYC norms and documentation requirements

The government has classified foreign portfolio investors (FPIs) from the UAE as eligible for taking up Category-I licence — a move that could boost investment from the region into India.

The UAE is the second non-FATF (Financial Action Task Force) Country, after Mauritius, to be given the exemption.

As many as 72 of the 113 FPIs coming from the UAE are currently classified as Category-II FPIs. The Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund, has been a major investor into India. “India’s strong ties with the UAE saw the ADIA being covered as a sovereign fund for tax holiday last year and now further push is being given to welcome and facilitate investments from the UAE. The government would have got comfort regarding compliance with FATF norms given that the UAE is a member of GCC (Gulf Cooperation Council), which is already a member of the FATF, and as such has the responsibility to ensure compliance,” said Sunil Gidwani, partner, Nangia Andersen.

Last year, the Securities and Exchange Board of India (Sebi) had relaxed its guidelines for FPIs seeking a Category-I licence, allowing investors from countries, which are not FATF members, to qualify for such registrations, if the countries are specified by the Indian government.

At present, the FATF has 39 members, including Australia, Singapore, Luxembourg, and China.

“The government has been easing existing processes to attract interest from global investors. Adding the UAE to the FPI Category 1 is another measure to improve economic prospects and increase foreign investments into India,” said a person who deals with FPIs. “The move may also encourage India-focused offshore funds investing in public markets to be domiciled in the UAE, especially Abu Dhabi Global Market and Dubai International Financial Centre.”

Last year's Budget had clarified that Category-II FPIs would be subject to indirect transfer provisions, which were earlier applicable to unregulated funds falling under Category-III.

Being part of Category-I implies lower compliance burden, simplified know-your-customer norms and documentation requirements, and fewer investment restrictions.

In 2019, Sebi had allowed central banks — which are not members of the Bank for International Settlements — to be eligible for FPI registration. This would enable central banks from over 60 countries, including those in West Asia, to invest as FPIs.

According to experts, banks from such countries have significant reserves and would like to invest in India. These countries’ fortunes are linked to oil prices. When oil prices dip, India would serve as a natural hedge, as it benefits from lower oil prices.

India and the UAE recently discussed potential opportunities for diversifying trade and investment links in order to strengthen bilateral ties in a post-pandemic world, according to reports.