SEBI approves draft SEBI (Foreign Portfolio Investors) Regulations, 2013

With a view to rationalising foreign portfolio investments by Foreign Institutional Investors (FIIs), Non Resident Indians (NRIs) and other foreign investors, the Securities and Exchange Board of India (SEBI) had formed a ‘Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments’ (Committee) under the Chairmanship of Shri K.M. Chandrashekar. The Committee submitted its report to the SEBI on 12 June 2013.

Considering the provisions of SEBI (FII) Regulations, 1995, current prevailing framework for Qualified Foreign Investors (QFIs) and the recommendations of the Committee, the SEBI has approved the draft SEBI (Foreign Portfolio Investors) Regulations, 2013 (FPI Regulations).

• Existing FIIs, sub-accounts and QFIs would be merged into a new investor class to be termed as ‘Foreign Portfolio Investor’ (FPI).
• Designated Depository Participants to grant registration to FPIs on behalf of SEBI, subject to compliance with Know Your Client (KYC) requirements.
• A risk based approach to be adopted towards KYC. FPIs to be classified into the following three categories from a KYC perspective:

- Category I (Low risk) – This category shall include Government and Government related foreign investors, etc;
- Category II (Moderate risk) - This category shall include appropriately regulated entities (including broad based funds), university funds, university related endowments, pension funds etc;
- Category III (High risk) - All other FPIs not eligible to be included in the above two Categories shall be included in this category.

• FPIs shall be allowed to invest in all those securities, wherein FIIs are allowed to invest.
• All existing FIIs/ sub-accounts may continue to buy, sell or otherwise deal in securities under the FPI regime. QFIs will be allowed to transact in securities for one year under their QFI registration from the date of the notification of the FPI Regulations.
• Category I and Category II FPIs shall be allowed to issue, or otherwise deal in offshore derivative instruments (ODIs), directly or indirectly. However, the FPI needs to be satisfied that such ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority after ensuring compliance with KYC norms.

Our comments

• Until notification of the FPI Regulations, the existing FII and QFI regime for investments under the portfolio investment route shall continue to be in force.
• The other recommendations of the Committee relating to classification as well as investment limits for Foreign Direct Investment and FPI, etc. have not been specified in the press release by the SEBI.
• Currently, the tax rules applicable to FIIs/ sub-accounts and QFIs differ. Once the FPI Regulations are finalised for implementation, one will have to wait for the consequential changes to be made to the tax regime. It is unclear whether a differential tax regime would be prescribed for various categories of FPIs or a uniform one.

We hope you find this update, both timely and useful