SEBI Board in its meeting held on October 06, 2012 decided that it will prepare a draft guideline based on the guidance of the Working Group on Foreign Investment in India (WGFI), for consideration of the Government of India (GoI).
To implement the above, SEBI formed a Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments (hereinafter referred to as Committee) under the Chairmanship of Shri K. M. Chandrasekhar, former Cabinet Secretary, GoI, comprising of representatives from GoI, RBI and various market participants.
After extensive deliberations, the Committee submitted its report earlier today i.e. June 12, 2013. The following are the major recommendations:
1. Existing FIIs, Sub Accounts and Qualified Foreign Investors (QFI) to be merged into a new investor class to be termed as Foreign Portfolio Investor (FPI). The aggregate investment limit will be 24% (being the present default aggregate limit for FIIs, which can be raised by the company upto the sectoral cap)
2. In view of the special nature of the investments from Non Resident Indians (NRIs) and Foreign Venture Capital Investors (FVCIs), it was felt desirable to continue with these two classes for the present
a. NRIs to continue to have individual investment limit of 5% and aggregate investment limit of 10%.
b. FVCI The Committee felt that the present list of nine sectors should be considerably expanded. Alternately a negative list may be announced by GoI so that rest of the sectors are opened for VCF activity.
3. In a significant move to make the procedure much simpler, the Committee recommended that prior direct registration of FIIs and Sub Accounts with SEBI should be done away with.
Instead, FPIs would be able to register themselves with and transact through Designated Depository Participants (DDPs). The qualification of DDPs would be as prescribed by SEBI.
4. Portfolio investments to be defined as investment by any single investor or investor group, which shall not exceed 10% of the equity of an Indian company. Any investment beyond the threshold of 10% shall be considered as Foreign Direct Investment (FDI).
The Committee has also dealt with migration of FPI into FDI and situations where FDI investments fall below 10%
5. Risk Based Approach towards Know Your Client (KYC) From the point of KYC, the Committee recommended for categorization of FPIs into three categories.
- Category I (Low Risk) – which would include Government and Government related entities such as Foreign Central Banks, Sovereign Wealth Funds, Multilateral Organizations etc.
- Category II (Moderate Risk) – which would include regulated entities such as Banks, Asset Management Companies, Broad Based Funds such as Mutual Funds, Investment Trusts, Insurance and Reinsurance Companies, University Funds, Pension Funds and University related Endowments already registered with SEBI.
- Category III (High Risk) All other FPIs not eligible to be included in the above two Categories.
The approach to KYC will be risk based. The documents needed for registration and onboarding would be the simplest for Category I and the most stringent for Category III.
The Committee recommended that the requirement of submitting personal identification documents such as copy of passport, photograph etc. of the designated officials of FPIs belonging to Category I and Category II shall be done away with. SEBI would separately prescribe the documentation needed for the three categories.
6. With regard to issuance of Offshore Derivative Instruments (ODI) / Participatory Notes (PN), the Committee recommended that FPIs belonging to the Category III shall not be allowed to issue ODI/ PN. Further, the ODI/ PN issuer FPIs will continue to report directly to SEBI, as prescribed by SEBI.
7. The Committee also identified the changes required to be effected in different statutes to bring about the proposed recommendations into effect.
With the simplification of procedures in KYC/ Account opening and onboarding etc., the Committee believes it will make the experience for FPI of entering into India more pleasuresome and smooth, resulting in increasing inflows into India.