Regulated entities like banks, AMCs can now invest as Category II FPIs

Regulated entities such as banks, asset management companies, and portfolio managers have been given the nod to undertake investments on behalf of their clients as Category-II foreign portfolio investors (FPIs). 

This is in addition to undertaking proprietary investment by taking separate registrations as category-I FPIs.

Until now, private banks had to pool money from different clients and set up a fund to invest money after separately registering as an FPI. With change in the Securities and Exchange Board of India’s (Sebi’s) operating guidelines, every client need not take a separate registration. The entities — be it private banks, asset or portfolio managers — can invest on behalf of these clients separately.

In case such entities are undertaking investments on behalf of their clients, Category-II FPI registration will be granted, provided the clients of the FPI are individuals and family offices.

Clients of the FPI should also be eligible for registration as FPIs and should not be dealing on behalf of a third party. An FPI has to provide investor details of clients quarterly.

“Foreign individuals and family houses have been allowed to invest through private banks and other regulated FPIs without the need to separately register as FPIs in India. Sebi has removed the restriction of requiring such FPIs to pool the client funds in one account,” said Rajesh Gandhi, partner, Deloitte India.

Let’s consider a private bank in Switzerland which has taken an FPI licence in India. Until early 2018, the private bank could invest only proprietary money. That changed after the regulator issued guidelines in February 2018, allowing private and merchant banks to invest on behalf of their clients. 

The current guidelines have permitted entities such as asset management companies, investment managers, investment advisors, portfolio managers, insurance & reinsurance entities, broker dealers, and swap dealers to undertake investments on behalf of their clients as Category-II FPIs.

“While reiterating the position in its earlier circulars permitting private, investment banks and other similar institutions to invest on behalf of its clients, the operating guidelines do away with the condition of these institutions being broad-based and having a common portfolio. 

This will give a lot of flexibility to them to invest, based on different client strategies. Sebi, however, requires a reporting of client details on a quarterly basis,” said Tejas Desai, partner, EY India. Moreover, FPIs from a financial action task force member country are permitted to do the KYC of clients in accordance with the requirements of the home jurisdiction of the FPI.

Separately, the regulator has made life easier for sovereign wealth funds, pension funds and endowment funds that typically invest through multiple investment manager (MIM) structures.

About 25 per cent of FPI investments are made through such structures. MIM structures need not fill out forms every time a new external investment manager is added but a simple request letter will suffice.

“In case of MIM structures, if the entity has already furnished registration details to a designated depository participant at the time of registration, then the entity will not be required to provide the registration details again for each new FPI registration under this structure,” observed the Sebi guidelines.