SEBI - New FPI Regulations

On January 7, 2014, the Securities and Exchange Board of India (‘SEBI’) notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), which are relevant to all foreign investors that conduct, or propose to conduct portfolio investments in Indian securities. On January 8, 2014, SEBI issued Operational Guidelines for implementation of the new regulations. The FPI Regulations will come into effect as soon as the corresponding amendments are brought about to the Indian exchange control regulations. Until then, SEBI continues to keep live the current Foreign Institutional Investor (‘FII’) Regulations and Qualified Foreign Investor (‘QFI’) Regulations, so as to ensure that business is notimpacted in any way on account of this regulatory development in India.

In this newsletter we have sought to discuss the key amendments that have been brought about by the new FPI Regulations and how they impact existing FIIs / sub-accounts and QFIs.

1. Background

1.1 Currently, foreign investors were allowed to invest in the Indian capital markets through different investment windows, each of which has its own regulatory framework, licensing / registration requirements and investment conditions. This makes the regulatory landscape in India rather complicated when compared to that of other emerging markets. For example, there is (i) the Non-Resident Indian (‘NRI’) investment window that applies to Indians that reside abroad and persons of Indian origin, who wish to invest in Indian listed securities, (ii) the FII window that applies to overseas institutional investors who wish to invest in Indian listed securities, and (iii) the QFI window that applies to all categories of foreign investors (be it institutional or non-institutional) who wish to invest in Indian listed securities. Separately, there is the (i) Foreign Direct Investment (‘FDI’) window that applies to all categories of foreign investors (be it institutional or non-institutional) who wish to make strategic and / or financial investments in Indian companies whether listed or not, and (ii) the Foreign Venture Capital Investor (‘FVCI’) window, which is a subset of the FDI window, and which applies to select foreign investors that are institutional in nature and who propose to make financial investments in Indian unlisted companies.

1.2 In November 2009, the Indian Government set-up a working group called the “Working Group on Foreign Investment in India” (‘WGFI’), with a view to rationalize the present arrangements relating to foreign portfolio investments by FIIs, NRIs, FVCIs, Private Equity Funds etc. In July 2010, the WGFI made various recommendations to the Indian Government, one of which included the need to simplify the current regulatory framework governing foreign portfolio investments into India, by clubbing the FII, QFI, FVCI, and NRI investment windows into a single window. SEBI, in its Board meeting held in October 2012, decided that it will prepare a draft guideline based on the guidance of the WGFI, for consideration of the Indian Government. Accordingly, SEBI constituted the “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”, under the Chairmanship of KM Chandrasekhar, to inter-aliaprepare a draft guideline and regulatory framework for an integrated policy on foreign investment, keeping as a starting point the recommendations of the WGFI, for the consideration of the Indian Government.

1.3 In February 2013, the Honourable Finance Minister while presenting his Union Budget 2013, inter-aliamade the following announcements with the objective of strengthen the Indian capital markets: (i) that the Government was going to bring all foreign portfolio investors who are keen on investing in Indian listed securities under a single window with the objective of simplifying and streamlining the entire investment process, (ii) that the licensing of such investors would now be outsourced to Designated Depository Participants (‘DDPs’) who are authorized by SEBI, subject to compliance with KYC guidelines, (iii) that SEBI would simply the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors, (iv) that SEBI would converge the different KYC norms and adopt a risk-based KYC approach to make it easier for foreign investors such as central banks, SWFs, university funds, pension funds etc to invest in India.

1.4 In June 2013, Chandrasekhar Committee recommended to SEBI that (i) the current mechanism of having separate investment windows for FIIs / sub-accounts, and QFIs should be done away with and going forward all such investors should be allowed to invest in Indian securities through a single window called the FPI window, (ii) the entry norms for such investors should be simplified by not requiring the foreign portfolio investors to obtain direct registration from SEBI, instead DDPs authorized by SEBI should register them, and (iii) there should be a uniform entry norm for all foreign portfolio investors. As regards the other investment windows that exist, ie the NRI window and the FVCI window, the Committee recommended that they be retained as is, with the need to expand the FVCI window to include more sectors under its ambit as against the current prescribed 9 sectors.

1.5 SEBI has accepted most of the recommendations of the Chandrasekhar Committee and has now notified the FPI Regulations. As a result, the erstwhile FII window and the QFI window have been merged into a single investment window: called the FPI window, and the SEBI (FII) Regulations, 1995 (‘FII Regulations’) and the QFI circulars have been repealed / rescinded.

1.6 In the ensuring paragraphs we have discussed some of the key changes that have been brought about by the FPI Regulations and how they impact new applicants as well as existing FIIs / sub-accounts and QFIs.

2. The new FPI Regulations

2.1 Very briefly, the new FPI Regulations are not very different from the erstwhile FII Regulations. There are a few changes that have been brought about, which we have discussed below, that can impact the way FIIs / sub-accounts invest in India. However, from a QFI’s perspective, the changes are much more significant as the new regulations have sought to upgrade the status of QFIs and brought them on par with FIIs / sub-accounts; thus, enabling QFIs to invest in a larger variety of securities, in addition to having access to larger investment limits as well as simplifying the operating framework for QFIs. We have discussed the impact of the new FPI Regulations on existing FIIs / sub-accounts and QFIs in more detail in Parts B and C of this newsletter.

2.2 Part A: Synopsis of the new FPI Regulations

2.2.1 For which type of foreign investors would the FPI Regulations be relevant?

The FPI Regulations are relevant for any foreign investor who wishes to conduct portfolio investments in Indian listed securities.

2.2.2 Are there any licensing requirements under the regulations?

A foreign investor who wishes to access the FPI window needs to obtain a certificate of registration from a DDP confirming that it is registered with SEBI as a FPI. The certificate will be issued by the DDP on behalf of SEBI, and will be done once the DDP is satisfied that the foreign investor meets the eligibility criteria prescribed under the regulations.

2.2.3 From when do the FPI Regulations actually come into effect?

Though the FPI Regulations have been notified and published in the Official Gazette on January 7, 2014, and are said to come into effect immediately, they will get operational only once the corresponding changes to the Indian exchange control laws are made. Until then foreign investors who wish to conduct portfolio investments in Indian listed securities would need to continue accessing the existing FII window and the QFI window. SEBI has indicated that it will continue to grant FII / sub-account registrations under the FII Regulations till March 31, 2014, which it may extend to June 30, 2014.

2.2.4 How does a foreign investor go about getting itself registered as a FPI?

The foreign investor will first need to appoint a DDP in India and file an application with the DDP in the prescribed Form A, along with the prescribed fees for seeking registration as a FPI. The DDP will review the application in detail and conduct a risk based KYC review of the applicant, which would vary depending on the nature of the FPI. The DDP is free to seek additional information / clarifications from the applicant to satisfy itself as regards the applicant’s eligibility to seek a FPI license, after which the DDP has the discretion to grant it the FPI license.

2.2.5 Who qualifies as a FPI?

Any person who satisfies all the below conditions qualify for registration as a FPI:

(i) It should be a non-resident as is defined in the Indian Income-tax Act, 1961 (‘Act’), and is nota non-resident Indian (‘NRI’)

(ii) It should be a resident of a country whose securities market regulator is a signatory to IOSCO’s Multilateral MOU (Appendix A Signatories) or is a signatory of a bilateral MOU with SEBI

(iii) It should not be from a country that is identified in the Financial Action Task Force’s (‘FATF’) public statements as (a) a jurisdiction having a strategic Anti-Money Laundering / Combating the Financing of Terrorism deficiency to which counter measures apply; or (b) a jurisdiction that has made limited progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies

(iv) If the applicant is a bank, then the bank should be resident of a country whose central bank is a member of Bank for International Settlements

(v) It should be legally permitted to invest in securities outside its home country. Further, its constitution should authorize it to invest on its own behalf or on behalf of its clients

(vi) It should have sufficient experience, good track record, professional competence, financially soundness and have a generally good reputation of fairness and integrity

(vii) It should be a ‘fit and proper’ person as specified by SEBI

SEBI has deemed allexisting FIIs / sub-accounts and QFIs who hold valid certificates of registration to be FPIs till the expiry of the block of 3 years for which they have paid their fees under the FII Regulations.

2.2.6 What are the categories of FPIs?

FPIs are to be categorized into the below three baskets based on their perceived risk profile. At a very high level, one would note that SEBI has clubbed (i) all Government and government related investors into Category I FPIs, (ii) all regulated entities into Category II FPIs, and (iii) all unregulated entities into Category III FPIs.

· Category I FPIs (Low risk entities) – They include Government and Government related investors such as Central Banks, Government agencies, SWFs, and international / multilateral organizations / agencies.

· Category II FPIs (Moderate risk entities) – They include mutual funds, investment trusts, insurance / reinsurance companies, banks, asset managers, investment advisors, portfolio managers, pension funds, university funds, university related endowments that are already registered with SEBI as FIIs / sub-accounts, and ‘broad based funds’that are not appropriately regulated but whose investment managers are appropriately regulated. In the case of such ‘broad based funds’, the investment manager needs to itself be registered with SEBI as a Category II FPI and the investment manager needs to undertake that it will be responsible and liable for all acts of such funds.

· Category III FPIs (High risk entities) – This is a residuary category and covers all types of investors who do notfall in the above two categories. Examples of such types of FPIs include endowments, charitable trusts, societies, foundations, corporate bodies, trusts, individuals, and family offices.

2.2.7 What is the significance of categorizing FPIs into the three baskets?

Under the current regulatory regime uniform KYC norms apply to all the above investors and this becomes very onerous for investors who fall under Categories I and II. Hence, SEBI has moved towards a risk based approach to KYC, by introducing the above categorization process so as to allay the concerns of investors who fall within the baskets of Category I and II, as regards the KYC requirements. Going forward, the KYC requirements to be fulfilled by each of the categories would be different, with Category I FPIs having to comply with the least KYC requirements, Category II FPIs having to comply with slightly more KYC requirements, and Category III FPIs having to comply with the maximum KYC requirements when compared to those applicable to the other two categories of FPIs.

2.2.8 Apart from the KYC issue are there any difference between the various categories?

We do notsee a major difference between the three categories. All three categories are treated on par when it comes to making investments, except that a few select Category II FPIs[1]and all Category III FPIs are not allowed to either issue to or invest in or deal in Offshore Derivative Instruments (‘ODIs’) that have been issued by FPIs.

2.2.9 What is the role played by a DDP in the context of a FPI?

(i) The DDP evaluates the application filed by a foreign investor seeking registration as a FPI, and then decides to grant a FPI license to the investor

(ii) It renders cash and custody services to its FPI clients so as to enable them conduct their investment activities

(iii) It is responsible along with the FPI, to ensure that the FPI complies with all the investments conditions / restrictions, and conditions that are prescribed by SEBI in its regulations

In summary, a DDP pays a role that is akin to that of a local custodian (who services clients that currently invest in Indian securities under the FII window) or a Qualified Depository Participant (‘QDP’) (who services clients that currently invest in Indian securities under the QFI window).

2.2.10Who is eligible for registration with SEBI as a DDP?

Every DPP needs to be licensed with SEBI in its capacity as such, and SEBI has stipulated various conditions that need to be satisfied by an applicant seeking registration as a DDP. The following persons are eligible for registration with SEBI as DDPs:

(i) Category 1 Banks in India who also render custody services to their clients, subject to them inter-aliahaving systems and procedures to comply with the requirements of FAFT, Prevention of Money Laundering Act, 2002 (‘PML’), Rules and circulars issued from time to time, being fit and proper, and satisfying any other criteria as may be specified by SEBI.

(ii) Global banks who are regulated in their home country, and who are willing to set-up custody operations in India, along with having a tie-up with a Category 1 Bank in India to be able to service their FPI clients. SEBI would grant such licenses on a case-to-case basis after being satisfied that the global bank has sufficient experience in providing custodial services and SEBI believes that the grant of such DDP license would be of interest to the development of the Indian securities market.

(iii) To ensure that the transition to the new FPI regime takes place smoothly and there is no inconvenience to investors, SEBI has deemed all existing custodians of FIIs / sub-accounts in India and existing QDPs who have QFI clients (irrespective of whether such QDPs have banking licenses), to be DDPs under the new FPI regulations; this is subject to the custodians and the QDPs paying certain fees to SEBI.

2.2.11Who qualifies as a ‘broad- based fund’for the purpose of Category II FPIs?

A ‘broad based fund’ means a fund that is established or incorporated outside India, having a minimum of 20 investors, with no single investor holding more than 49 percent of the shares / units of the fund. The fund must at all times meet the above requirements.

For ascertaining the number of investors in the fund, direct as well as underlying investors are to be considered. Only investors of entities which have been set up for the sole purpose of pooling funds and making investments, are to be considered for the purpose of determining the underlying investors.

Institutional investors in the fund who hold more than 49 percent of the shares / units in the fund will be allowed to do so only if they themselves are broad based.

2.2.12Are there any exceptions to the ‘broad- based’test?

If an applicant is a newly incorporated / established fund seeking to register itself as a broad based fund under Category II, but does not satisfy the broad based criteria at the time of making the application, the DPP may consider granting of a conditional registration, with a validity of 6 months to such applicant, if:

· The applicant is an India dedicated fund or undertakes to make investment of at least 5 percent of the corpus of the fund in India; and

· The applicant undertakes to comply with the broad based criteria within 6 months.

Once the applicant attains broad based status, the conditional registration shall be treated as a proper registration. However, if the FPI fails to meet the broad based criteria within the 6 months timeframe, it shall be reclassified as a Category III FPI.

Similarly, if an existing broad based fund that is registered as a Category II FPI ceases to remain broad based on account of redemptions etc, it will need to ensure that it invests at least 5 percent of its corpus in Indian securities and will be given a moratorium period of 6 months to meet the broad based test, failing which its status will also be downgraded to a Category III FPI.

2.2.13What are the types of securities that an FPI can invest in?

FPIs will be allowed to invest in the following types of Indian securities:

(i) Securities in the primarily and secondary markets, including shares, debentures and warrants of companies, listed or to be listed on a recognized stock exchange (‘RSE’) in India

(ii) Units of Indian mutual fund schemes

(iii) Units of schemes floated by collection investment schemes (‘CIS’)

(iv) Derivatives traded on RSEs

(v) Government Securities and Treasury Bills

(vi) Commercial Paper (‘CP’) issued by Indian corporates

(vii) Rupee denominated credit enhanced bonds

(viii) Security receipts (‘SRs’) issued by asset reconstruction companies (‘ARCs’)

(ix) Perpetual debt instruments and debt capital instruments, as specified by the RBI from time to time

(x) Listed and unlisted non-convertible debentures (‘NCDs’) / bonds issued by Indian corporates in the infrastructure sector, where infrastructure is defined in terms of the extant External Commercial Borrowing (‘ECB’) guidelines

(xi) NCDs or bonds issued by Non-Banking Finance Companies categorized as Infrastructure Finance Companies (‘IFCs’) by the RBI

(xii) Rupee denominated bonds and units issued by infrastructure debt funds (‘IDFs’)

(xiii) Indian Depository Receipts (‘IDRs’)

(xiv) Such other instruments specified by SEBI from time to time

‘Unlisted securities’of Indian corporates, which was a security that FIIs / sub-accounts were allowed to invest in under the FII Regulations, have been dropped from the FPI Regulations. This stems from one of the recommendations of the Chandrasekhar Committee. The Indian Government has constituted a separate committee called “the Committee for Rationalizing the Definition of FDI and FII”,which is examining and working out details of the application of the principle internationally for defining FDI and FII. The Chandrasekhar Committee has recommended to the “the Committee for Rationalizing the Definition of FDI and FII” that inter-alia investments in ‘unlisted securities’, regardless of the level of ownership that it represents should be regarded as FDI.

2.2.14What are the investment limits that are applicable to FPIs?

FPIs enjoy the same investment limits as are currently allowed to FIIs, ie a single investor or single group of investors can invest a maximum of 10 percent in the paid-up capital of an Indian company. The cap on the aggregate FPI holding in an Indian company is yet to be notified by the RBI. However, it is anticipated that it will be on similar lines to those currently applicable to FIIs. The Chandrashekar Committee has also recommended this, ie the aggregate cap for all FPIs in an Indian company should be retained at the lower of (i) 24 percent of the paid-up capital of the company, or (ii) the sector cap; however, once the company raises its foreign ownership limit to the sectoral cap as per the FDI policy, then the foreign ownership would need to be monitored at that level. It would be pertinent to note that the above investment limits would uniformly apply to all categories of FPIs (including existing FIIs / sub-accounts and QFIs).

The monitoring of the above investment limits needs to be done at an ‘investor group level’ after considering who the ultimate beneficial owner is or who holds the ultimate beneficial interest in the investing entity/ies. For this purpose, FPIs are required to provide details of all investors that have direct or indirect common shareholding / beneficial ownership / beneficial interest, of more than 50 percent in the FPI’s investing entity; this practice of tracking the identity of the ultimate beneficial owner in an entity who owns more than 50 percent of the total capital of that entity (called the ‘ownership test’)is currently followed for FIIs. The FPI Regulations have sought to replicate this practice. However, in the FPI Regulations, SEBI has stipulated that the monitoring of this limit needs to be done based on (i) the shareholding, (ii) the voting rights, and (iii) any other forms of control that may exist in excess of 50 percent across FPIs, if any. The two new tests of considering voting rights and any other forms of control in the investing entities (called the ‘control test’) can throw up some odd outcomes especially in cases where majority capital ownership lies with one investor / one investor group, but the control over the entity lies with another group (for example the fund manager’s group). It is our understanding that in such instances, the ‘ownership test’should prevail over the ‘control test’.

FPIs are required to submit the data of their ‘investor group’ in a prescribed format to their DDPs. This data is to be onward shared by the DDPs to both the depositories in India, who are responsible for monitoring the 10 percent investment limit. Where the aggregate holding of FPIs belonging to a single investor group exceeds the stipulated limit, the depositories are required to (i) put in place a proper mechanism to bring back the holdings within the stipulated limit of 7 days, and (ii) report the details of such breaches to SEBI.

2.2.15What is an ODI?

An ODI is defined to mean any instrument, by whatever name called, which is issued overseas by a FPI against securities held by it that are listed or proposed to be listed on a RSE in India, as its underlying.

2.2.16Who can issue, subscribe or deal in ODIs?

Only entities that are licensed as FPIs, are allowed to issue, subscribe or otherwise deal in ODIs, directly or indirectly, subject to the satisfying the following conditions:

(i) The FPI is neither a Category III FPI nor a Category II FPI that is an unregulated broad based fund whose investment manager is regulated

(ii) The ODIs are issued only to persons who are regulated by an appropriate foreign regulatory authority

(iii) The ODIs are issued after compliance with KYC norms

(iv) The FPI has to ensure that any further issue or transfer of any ODIs issued by or on behalf of it is made only to persons who are regulated by an appropriate foreign regulatory authority

(v) The FPI fully discloses to SEBI any information concerning the terms of and parties to the ODIs issued at the back of any Indian securities listed or proposed to be listed on a RSE in India, as and when such information is called for

2.2.17What are the key operational requirements that need to be complied with by a FPI?

A FPI must -

(i) Appoint a DDP, who will also act as the banker and custodian for the FPI in India

(ii) Open cash and custody accounts with such DDP

(iii) Appoint a SEBI registered stock broker(s) to transact in Indian securities. The FPI would need to issue its investment instructions directly to the stock brokers

(iv) Appoint a Chartered Accountant in India that will help it with all its India tax compliances

(v) Maintain, for a minimum period of 5 years, prescribed books, records and documents relating to its investment in Indian securities, as is prescribed by SEBI

(vi) Appoint a Compliance Officer who will be responsible for monitoring compliances with the FPI Regulations and who will report all non-compliances to SEBI and the DDP

(vii) Comply with the provisions (including the Code of Conduct) specified in the FPI Regulations

2.2.18How are FPIs to be taxed in India?

The FPI Regulations provide that the Indian Revenue authorities (‘IRA’) are to issue directions on how FPIs ought to be taxed in India. As of today, the Act contains specific provisions for taxation of FIIs / sub-accounts in India. The Act affords a concessional basis of taxation to FIIs / sub-accounts in terms of (i) taxing the income earned by them from sale of Indian securities as capital gains, (ii) prescribing concessional tax rates for this type of investor, and (iii) exempting them from withholding tax requirements on their capital gains income. FIIs / sub-accounts are allowed to freely repatriate their monies lying in India to their bank accounts overseas, by furnishing their Indian bankers / custodians with a certificate from a Chartered Accountant in India confirming that taxes due on such income have been properly discharged by them.

However, the Act does notgrant QFIs with the same taxing benefits that it affords to FIIs / sub-accounts. Though, QFIs enjoy some concessional tax rates that are also enjoyed by FIIs / sub-accounts, there is no clear direction on whether their income from sale of Indian securities would be taxed as capital gains or business income. Further, QFIs are not exempted from Indian withholding tax as is the case with FIIs / sub-accounts. Separately, the entire remittance procedure that is to be followed for QFIs is very different from what is currently followed for FIIs / sub-accounts, in as much as in the case of QFIs, the QDP appointed by the QFI has been entrusted with the obligation of ensuring that the QFI discharges its Indian tax liability (if any) properly prior to effecting any remittance. The IRA also issued a set of FAQs for QFIs on how their Indian tax liability has to be computed in India for the purpose of tax withholding; these FAQs stipulate an ultra-conservative basis of computing the QFIs’ Indian tax liability, which also contradicts some of the provisions of the Act. For example, (i) the FAQs indicated that the QFIs should not be allowed the benefit of setting off their brought tax losses (if any) that may be available for set-off purposes against their current income, at the time of repatriating the funds outside India, (ii) the FAQs do notprovide clear guidance on whether the income to be earned by QFIs from their Indian investments would be taxed as capital gains or business income, etc. The lack of clarity and certainty around how QFIs ought to be taxed in India, has resulted in the QFI window becoming unattractive and investments by QFIs till date being negligible.

FPIs, being a new category of foreign investors, are notspecifically dealt with in the Indian domestic tax law. The Government needs to issue guidelines clarifying how FPIs ought to be taxed in India. It is expected that the above taxing framework that currently applies to FIIs / sub-accounts would be extended to FPIs; but, this needs to be specifically notified by the Government either by way of a notification / circular or an amendment to the Act. If done on these lines, the FPI regime would provide a uniform taxing regime for all categories of FPIs (including FIIs / sub-accounts and QFIs as and when they get themselves registered as FPIs).

2.3 Part B: Impact of the FPI Regulations on existing FIIs / sub-accounts

2.3.1 Existing FIIs / sub-accounts will be required to get themselves registered with SEBI as FPIs only once their existing licenses come up for renewal after completion of their 3 year term or until such time as they choose to obtain a certificate of registration as a FPI, whichever is earlier.

2.3.2 The FPI Regulations are modeled largely on the lines of the current FII Regulations. Hence, they do notsignificantly impact existing FIIs / sub-accounts, with the exception of the following:

· SEBI has done away with the concept of sub-accounts. Hence, each FII / sub-account would need to evaluate its structure and see under which category of FPI it would fall as and when its license comes up for renewal.

· ODI issuing FIIs would need to cease issuing new ODIs to clients who are (i) not ‘broad based’ or (ii) who are notregulated but whose investment managers are regulated, which was previously allowed. The good thing is that SEBI has grandfathered all ODIs issued prior to the release of the FPI Regulations.

· In case of those FIIs / sub-accounts that are currently invested in Indian ‘unlisted securities’,it is unclear on whether SEBI will grandfather such investments once the new FPI Regulations become applicable to them, ie post their FII / sub-account licenses coming up for renewal, or whether SEBI will simply require such investments to be treated as FDI investments.

2.3.3 FIIs / sub-accounts should take note of the following issues as there appears to be minor changes in the wording of the regulations; though, such changes are notto have any material impact on FIIs / sub-accounts:

· Though the definition of term ‘broad based funds’ has been modified slightly under the FPI Regulations, in spirit there is no change in the regulation, ie a broad based fund would need to ensure that at all times it has a minimum of 20 investors in the fund with no single investor holding more than 49 percent of the shares / units in the fund. The fund would need to ensure that it meets the 20 investor requirement after counting direct investors in the fund as well as underlying investors in their pooled clients. An investor will be allowed to own more than 49 percent of the shares / units in the fund, only if it is an institutional investor and such investor is itself broad based.

· Though SEBI has made a minor modification to how monitoring of investment limits is to be done at the ‘investor group level’by introducing a new ‘control test’ in addition to the existing ‘ownership test’, this should notimpact the overall monitoring framework as SEBI has indicated that if there is a situation wherein the two tests through up different outcomes then the ‘ownership test’shall prevail over the ‘control test’.

· Even though the FPI Regulations allow existing FIIs / sub-account to get themselves registered immediately with SEBI as FPIs (ie at the option of the FIIs / sub-accounts), they may notwant to do so until there is certainty around how FPIs are to be taxed in India. This is because so long as the entities have a license issued by SEBI that confirms the fact that they are registered with SEBI as “FIIs / sub-accounts” they would continue to enjoy the concessional basis of taxation that is afforded by the IRA to FIIs / sub-accounts under the Act.

2.4 Part C: Impact of the FPI Regulations on existing QFIs

2.4.1 Existing QFIs will be required to get themselves registered with SEBI as FPIs after 1-year from the date of commencement of the FPI Regulations or until such time as the QFIs choose to obtain a certificate of registration as a FPI, whichever is earlier.

2.4.2 Given that the FPI Regulations treat QFIs as a part of FPIs, (ie Category III FPIs), QFIs stand to benefit significantly from this development, owing to the following:

· Firstly, they would be able to invest in a whole host of new Indian securities which they were previously not allowed to invest in. For example, under the current regime, QFIs are allowed to invest in only the following six types of Indian securities: (i) equity and debt schemes of Indian mutual funds, (ii) equity shares listed on RSEs in India, (iii) equity shares offered through public offers, (iv) corporate bonds listed / to be listed on RSEs in India, (v) Government Securities and Treasury Bills, and (vi) CPs. With the introduction of the FPI Regulations, QFIs will now be able to invest in the following additional securities: (i) derivatives listed RSEs in India, (ii) units of CIS, (iii) SRs issued by ARCs, (iv) perpetual debt instruments and debt capital instruments as specified by the RBI from time to time, (v) Rupee denominated bonds / units of IDFs, (vi) IDRs, and (vii) such other instruments as may be specified by SEBI from time to time.

· Secondly, as regards a single QFI’s investment in an Indian listed company, it was previously allowed to invest a maximum of up to 5 percent of the total paid-up capital of the company; this limit would now double, as an FPI can invest a maximum of 10 percent of the total paid-up capital of an Indian listed company.

· Thirdly, under the current regulations, the aggregate QFI holding in an Indian listed company cannot exceed 10 percent of the total paid-up capital of the company. Under the new FPI regime, this limit is to be enhanced and subsumed within a common limit applicable to both all categories of FPIs (including FIIs / sub-accounts and QFIs).