New Regime For FPIs: Top Five Changes Proposed By The SEBI Committee
SEBI committee proposes an FPI regime that promises a harmonised and hassle-free investment experience.
There are over 50 circulars, 183 frequently asked questions and surviving framework of the foreign institutional investment regime that governs SEBI’s 2014 regulatory policy for foreign portfolio investors coming to India. Over the last five years, foreign investors have complained of challenges around registration, know your customer requirements, disclosures around their beneficial owners, investment limits, among others. While these challenges were responded to from time to time, the Securities and Exchange Board of India also set up a committee, led by RBI’s former Deputy Governor HR Khan, to review the FPI regime extensively.
The committee has now submitted its report with detailed recommendations around FPI registration, KYC & documentation simplification, investment permissions and harmonisation of foreign direct investment and FPI rules. The top five suggestions of the HR Khan Committee are:
Liberalised Investment Cap
The committee has acknowledged the issue of availability of investible stock to foreign portfolio investors. The existing framework of Foreign Exchange Management Act allows such investors to collectively invest up to 24 percent in a listed Indian company.
However, companies are allowed to increase this aggregate limit up to the sectoral cap or statutory ceiling via board approval or special resolution respectively. But a lot of listed companies haven't taken the initiative to increase the cap or they do so in small incremental portions i.e. fixing the limit somewhere between 24 percent and the sectoral cap, the committee has explained.
And so the committee has recommended that the headroom available to FPIs in a large number of stocks can be improved by setting the default aggregate investment limit to the sectoral cap. And if companies wish to decrease the aggregate limit to 24, 49 or 74 percent, they be allowed to do so after board approval and special resolution.
This will significantly improve aggregate investment headroom for FPIs and contribute towards achieving higher weightage for India in widely followed international indices.
Strengthening Of Clubbing Restrictions
Currently, if two or more FPIs have direct or indirect common ownership (50 percent or more) or common control, they're treated as forming part of an investor group and the investment limits of all such entities are clubbed for monitoring of investment limit, or below 10 percent of the paid up capital of the company.
The committee has pointed out that there could be a situation where one foreign investor group entity acquires shares under FPI route and another group company acquires shares of the same company under FDI (foreign direct investment) route.
To address this, the committee has suggested that the investor group should consist of all associate entities of FPI who are investing in Indian securities and identified on the basis of common ownership of more than 50 percent or common control.
“FPIs need to ensure that holding of all their group entities in shares of a company shall be below 10 percent. In case the limit is breached, either all entities of investor group are re-categorised as FDI or divestment is made within five trading days from the date of settlement of the trades causing the breach.”
Broad-Based Fund: Criteria
SEBI defines broad based fund as a fund, incorporated outside India, which has at least 20 investors, with no investor holding more than 49 percent of the shares or units of the fund. Foreign funds seeking registration with SEBI as Category II FPIs are required to meet the broad-based criteria.
- The committee has noted that ownership or interest in a broad-based fund should not be limited to shares or units but should also extend to any economic form.
“The broad basing should be on basis of economic ownership interest either by way of holding units/shares or other instruments.”
- Additionally, the committee has sought to fix a gap in situations where broad-based status is achieved on the basis of investors of an underlying fund. For example, consider a fund having two investors with each having 49 percent holding and one broad-based fund holding two percent stake. Such a fund achieves broad-based status on the basis of such underlying fund holding mere 2 percent stake, the committee has explained. To obviate such cases, the minimum shareholding criteria of 25 percent must be introduced, the committee has stated.
“In order to rely on an investor fund for satisfying broad based criterion, such investor fund(s) singly or together should at least be 25 percent in order to achieve broad based status for the fund. Existing FPIs not meeting this condition will be grandfathered for a period of three years from the date of notification of this change.”
- Finally, it has suggested that the narration of broad-based funds be more explicit to include collective investment vehicle in addition to mutual funds, investment trusts and insurance/reinsurance companies.
“Broad-based funds shall include entities set up as collective investment vehicles.”
Avoiding Duplicity In KYC And PAN Verification
The committee has pointed out that around 80 percent of FPIs in India are coming through global custodians. Some global custodians have their group entities operating as local custodians in India. And so, it has suggested that FPIs that have already undergone KYC with their global custodian need not repeat that process in India.
For non-permanent account number-related KYC documents, SEBI may consider permitting a local custodian to rely on KYC carried out by its group entity which is regulated and is from a member country of Financial Action Task Force.
“SEBI may require the group entity of the local custodian or the FPI to provide an undertaking to say that relevant KYC documents will be submitted to the local custodian.”
For PAN-related KYC too, the committee has proposed a hassle-free process. Currently, FPIs are required to provide self-certified copy of the PAN card for account opening. Such PAN card copy needs to be verified from the income-tax department authorised website, by the custodian. As the PAN card issuance takes about two weeks and additional two to three weeks for the courier to reach the foreign address of the FPI, there is a delay in the account opening process.
The committee has suggested that this timeline be reduced by doing away with requirement of a physical PAN copy.
“The custodian should be permitted to open accounts once the PAN details are available and can be verified on the Income-Tax website. Verification of PAN on the specified website of the Income tax authorities should be sufficient and there should be no need to provide/ receive PAN Cards.”
Alternatively, e-PAN issued by CBDT can also be produced by FPI for KYC compliance without requiring any certifications, the committee has suggested.
Offshore Funds: Plugging Regulatory Arbitrage
Offshore funds, floated by Indian mutual funds, invest in India on the basis of no-objection certificate issued by SEBI. Given that investments by these funds are portfolio investments in Indian capital markets, they should be covered under the ambit of FPI regulations to prevent possible regulatory arbitrage and for rationalisation of overall regulatory framework, the committee has said.
“Offshore funds floated by Indian mutual funds can invest in India only after seeking registration as FPI. Existing offshore funds investing in India shall obtain registration within 180 days from the notification of this change.”
Besides these challenges, the committee has also recognized that FPIs may get stuck if they are unable to sell their holdings on exchanges due to liquidity or credit of unlisted shares etc. In such situations, FPIs should be permitted off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic investor, the committee has said.