HR Khan Committee Report: Revamping The FPI Regime In India
Indian two thousand rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

HR Khan Committee Report: Revamping The FPI Regime In India


SEBI had constituted a working committee under the chairmanship of HR Khan, retired deputy governor, Reserve Bank of India, which was entrusted with the task of reviewing the current Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 and recommending any amendments that may be required for rationalising and simplifying the SEBI FPI regulations.

The Khan Committee has submitted its report on May 24 to SEBI which has been placed on SEBI’s website for public comments until June 14.

The Khan Committee divided its recommendations under four buckets –

(a) FPI registration process

(b) KYC and documentation simplification

(c) investment permissions and limits

(d) other aspects

In this article, we primarily focus on the recommendations made under the section – Investment Permissions and Limits as these relate to a harmonised and collective approach from both SEBI and the RBI. These recommendations will have significant impact on foreign investment laws, FEMA regulations as well as on the securities markets regime in India.
The Khan Committee ventures into rationalising and harmonising the current foreign investment permissions and limits with the SEBI FPI regulations.

Reversing The 24% Limit

Schedule 2 of the current FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (FEMA 20) specifies that FPIs can collectively invest up to 24 percent of the paid-up capital in an Indian company and individually up to 10 percent. However, such an aggregate limit of 24 percent can be increased by such Indian company up to the total foreign investment sectoral or statutory cap, with the approval of its board of directors and shareholders through a special resolution.

This would mean that the cap remained at 24 percent unless and until increased to the sectoral cap by the company.

The Khan Committee has recommended increasing this aggregate limit of FPI holding in an Indian company up to the total foreign investment sectoral or statutory cap instead of limiting it at 24 percent. However, if a company specifically wants to reduce it to 24 percent or any other level below the sectoral cap, it can do that with the approval of its board of directors and shareholders through a resolution.

While it may seem like a status-quo in a reverse way, it is actually a significant change.

This could really open up FPI investments in listed companies, in primary as well as secondary markets. However, the implementation of this change will have to be done in a phased manner.

For example, if a company which currently has the FPI investment limit set at 24 percent despite its sectoral cap being 74 percent will suddenly become exposed to FPI investment up to 74 percent in it. If the company wants to keep its FPI limit unchanged at 24 percent, it will have to first pass a board, and then a shareholders resolution in a general meeting to bring it down to 24 percent from 74 percent. However, holding such meetings takes time given the general meetings are required to be held once in a year.
Accordingly, if this recommendation is implemented, such provision should be made effective only after a period of 12 months from date of publication of such provision so that if a company wants to voluntarily keep its FPI investment limit down to 24 percent or any other number below its sectoral limit it has adequate time to do that.

Such changes will also require similar changes to be made in the FEMA 20 and coordination with the RBI will be necessary.

Prohibited Sectors

The recommendation regarding FPI investment in certain prohibited sectors such as gambling, tobacco, real estate, chit fund etc. is also much nuanced and shows sign of thoughtful consideration given the sensitivity involved in such sectors.

Given that the FPI investments are limited to 10 percent on individual basis, the Khan Committee rightly highlights the difference between FDI and FPI investments and makes a fine case for investment by FPIs in such prohibited sectors as FPI investments are not strategic in nature like FDI.

It may be noted that such change too would require amendment of the FEMA 20 in coordination with the RBI.

Harmonisation Of Regulations

The Khan Committee has also proposed certain harmonisation steps between SEBI and the RBI and the various rules and regulations issued by these two authorities. While these are much required recommendations, some of these deserve additional attention.

SEBI FPI regulations should be updated to provide that paid-up equity capital on a fully diluted basis is in line with the FEMA regulations.

Provisions regarding permission to FPIs to invest in infrastructure trusts - InvITs, rea estate trusts - REITs and alternate investment funds - AIFs should be included in all relevant regulations to remove any confusion that may arise in FPI investments in InvITs, REITs or AIFs. These changes will be required to make InvIT, REIT and AIF more attractive to FPIs and hopefully will help make these instruments more successful on an overall basis.


Another very interesting recommendation is replacing the word ‘companies’ with ‘bodies corporate’ in the SEBI FPI regulations in relation to eligible instruments in which an FPI can invest. Current regulations specify that FPIs can invest in shares, debentures and warrants of ‘companies’, listed or to be listed on a recognised stock exchange in India. It should be noted here that body corporate is a broader concept.

All companies are bodies corporate but all bodies corporate are not companies.

Under the Companies Act, 2013, a body corporate includes a private company, a public company, a one person company (OPC), a small company, a limited liability partnership (LLP), a foreign company etc.

The definition of body corporate is inclusive and the proposed recommendation by the Khan Committee will extend FPI investments to LLPs as well as statutory bodies like NHAI, the General Medical Council etc.

The clarity provided on the ‘to be listed’ shares is also a welcome clarification. The report details that “FPIs shall be permitted to acquire “to be listed” securities only in case of initial public offer (IPO)...”

While most of the participants (issuers, bankers, legal advisors etc.) have mostly been following this clarification in practice based on self-interpretation, a specific regulatory clarification on this issue always makes it more streamlined and clear.

Rights Entitlement

A peculiar recommendation made by the Khan Committee is that transfer of rights entitlements in rights issues shall be at ruling market price or fair market value, as applicable. Renunciation of rights entitlements is permitted under the Companies Act, 2013.

In rights issues by listed companies, the renunciation or transfer of rights entitlements happen in two ways:

  • On the floor of the stock exchange
  • Through private arrangement
It should be appreciated that rights entitlements are not shares and they are rights to subscribe to shares in a rights issue. 

Once an investor acquires the rights entitlement through renunciation from an existing shareholder, the investor has to apply for subscription of the rights issue shares by paying full subscription amount. So whatever cost the investor incurs in acquiring the rights entitlement is in addition to the full subscription amount the investor pays to the issuer company for the subscription of the rights shares in a rights issue.

While FEMA 20 historically dealt with transfer of shares between resident and non-resident, it was silent on transfer of rights entitlements between residents and non-residents until 2017. However, in 2017, the FEMA 20 was overhauled and transfer of rights entitlements between residents and non-residents was permitted pursuant to the explanation added to Regulation 6 of the FEMA 20.

Regulation 6 exempts subscription or acquisition of shares in a rights issue by a non-resident from the pricing guidelines which are otherwise applicable to such acquisition of shares by non-residents.

The explanation added to Regulation 6 extended such exemption from pricing guidelines to renunciation of rights entitlements to non-residents as well. This was a welcome change made in the FEMA 20.

However, the recommendation of the Khan Committee that transfer of rights entitlements to FPIs shall be at the ruling market price (in case of renunciation at the floor of the stock exchange) or at the fair market value (in case of private arrangement) brings a unique pricing restriction to such renunciation which was until now not regulated at all in terms of pricing.

Given that the transfer of rights entitlements are not transfer of shares and the FPI will anyway pay the subscription price determined by the issuer at the time of subscription (after acquiring such rights entitlement), introduction of a pricing guideline at the transfer of rights entitlement will make renunciation very complex.

Given that these are rights entitlements and not rights shares, determination of the ruling market price or the fair market value of such rights entitlements will be almost impossible and impractical. 

The rights entitlements can never be benchmarked to the trading price or the fair market value of the shares of the company as the consideration paid for acquiring the rights entitlement will be in addition to the consideration an investor will pay to the company for subscribing to the rights shares. Accordingly, it would be great if this specific recommendation is not implemented.

Additionally, such an amendment brought in the SEBI FPI regulations will partially negate the import of the explanation added to Regulation 6 of the FEMA 20. Further, regulating the pricing of renunciation involving FPIs in rights issues while the other non-resident investors remain unregulated in relation to pricing in their renunciation of rights entitlements in rights issues is not equitable and sends a very discouraging signal to the FPI community from two significant regulators – SEBI and the RBI.

Sayantan Dutta is partner in the capital markets practice of Shardul Amarchand Mangaldas & Co and is based out of its New Delhi office.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.

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