Sebi clears way to make foreign investors feel at home

FII, QFI classes merged into FPI, which won't have to register with Sebi directly; new regulations meant to simplify procedure and improve investment climate

Market regulator Securities and Exchange Board of India (Sebi) on Saturday cleared the decks for a new, simpler investment regime for foreign portfolio investment in the country. The Sebi board approved the draft SEBI Foreign Portfolio Investors (FPI) Regulations, 2013, to replace the existing two-decade-old SEBI Foreign Institutional Investors (FII) Regulations.

Under the new system, the two existing investor classes — foreign institutional investors (FIIs) and qualified foreign investors (QFIs) — will be merged into a single investment class to be called FPIs (foreign portfolio investors). Unlike earlier, FPIs won't have to register with the market regulator directly.

Experts have said though the new rules have been made simpler for foreign investors yet their sentiment may not change until the economic conditions improve. “Some thorns have been taken out but we are not offering any flowers. The sentiment will improve when there is a revival in economic growth and corporate earnings improve,” said Sandeep Parekh, founder, Finsec Law Advisors, who termed the new regulations as simplified. “Prima facie, there is no new obligation created. The new rules shouldn't be disruptive,” he added.

R.I.P. FII, HELLO FPI

• Foreign portfolio investment routes, FII and QFI, to be merged
• New investor class to be called Foreign Portfolio Investors (FPIs)
• FPIs to register with DDPs instead of Sebi
• QFI given one year to obtain FPI registration
• New profile-based registration system for FPIs
• FPIs to issue P-notes only to entities that are regulated
• Sebi board approves FPI Regulations, 2013
• Experts say new regulations to replace Sebi FII Regulations, 1995

“The regulations have been framed keeping in view the provisions of the Sebi FII regulations of 1995, the QFI framework and the recommendations of the committee on rationalisation of investment routes and monitoring of foreign portfolio investments,” the Sebi said in a press release. It said the existing FIIs and sub-accounts could continue to operate under the FPI regime. However, QFIs would have to obtain FPI registration within a year.

Suresh V Swamy, executive director, tax & regulatory services at PricewaterhouseCoopers, said the additional time would help QFIs transition smoothly to the FPI regime. “There will need to be some clarification on the responsibilities of the custodian when it comes to taxation. The local custodian is treated as a ‘representative assesse’ in respect of tax payable by the QFI. In case of FIIs, the local custodian only has to make sure that proper taxes have been discharged by the FII.” he said.

The regulator has also said FPIs would have to ensure that participatory notes (p-notes) are issued only to entities regulated by an “appropriate foreign regulatory authority”.

The know-your-customer (KYC) requirement for FPIs has also been eased by the Sebi, depending upon the profile. Systematically important institutions like foreign central banks, sovereign wealth funds, to be classified as Category-I investors, will have little documentation. Category-II FPIs, which include mutual funds, insurance companies and pension funds, will also have easier KYC documents, while it will be stricter for corporate bodies, individuals and trusts, who will come under Category III.

Designated depositary participant (DDPs) will be the new link between FPIs and the Sebi going forward. DDPs will have to do the FPI registration with the Sebi and also perform some regulatory functions such as identifying the end-beneficiaries and other due diligence.