The Securities and Exchange Board of India on Wednesday announced that its board had approved to ease the regulatory framework for foreign portfolio investors (FPIs). Not only would these changes make life easier for FPIs, but would also enable a new class of investors to invest in India. The FPI regulations have been revised based on the recommendation of a committee headed by former Reserve Bank of India deputy governor HR Khan.
Under the new framework, FPIs would now be classified into two categories instead of three. It also removed broad-based eligibility criteria for institutional FPIs to “simplify and expedite” the registration process of FPIs. Any entity which had to meet the broad-based criteria needed to have at least 20 investors with investment of no more than 49%, with certain exceptions. With these changes the market has opened up to an entirely new class of FPI investors.
Government entities too would now be able to register as FPIs, which could see an entirely new class of FPI investors coming to India. The regulator said, “Considering that the central banks are relatively long term, low risk investors directly/ indirectly managed by the government, the central banks that are not the members of BIS (Bank for International Settlement) shall also be eligible for FPI registration.”
Foreign investors have sold Indian equities to the tune of $3.2 billion since July 2019, following the new tax regime announced in the Budget last month. Experts believe that the new framework would give a boost to the FPI route. In a bid to make the process of registration less tedious, the markets regulator has simplified documentation requirements for KYC. And in a move that would give momentum to registrations at the International Financial Services Centre, Sebi has said that entities established there would be deemed to have met jurisdiction criteria.
Shruti Rajan, partner, Cyril Amarchand Mangaldas, said that relaxing the broad-based criteria would open up the FPI route to a whole new category of entities who were unable to meet the 20 investor test. Earlier, entity which had to meet the broad-based criteria would have needed to have at least 20 investors with investment of no more than 49%, with certain exceptions. At the same time, experts believe that the fine print would tell what limitations have been imposed on FPIs now that one category of FPIs has been entirely done away with. For instance, can all Category II FPIs issue ODIs is something that needs further clarity.
The markets regulator has said that requirements for issuance and subscription of offshore derivative instruments (ODIs) had been rationalized. Experts believe this is the most interesting part of the release, as it has historically been a matter of debate within the industry and, Rajan believes, it will be interesting to see what changes are finally implemented.
Currently, the ODI business is regulated strictly, even though it is an entirely offshore product to prevent unlicensed entities to have access to ODIs. Entities that subscribe to ODIs face multiple restrictions, including being a regulated entity in their home jurisdiction. So now, with the FPI route being broadened, the sense is the government wants direct investors to come into the market and not do business through ODIs. It needs to be clarified what changes have been made to rationalise issuance of ODIs and whether these changes will help the ODI business.
In addition, Sebi has also allowed offshore funds floated by domestic mutual funds shall be allowed to invest in India after registering as FPIs. According to Pradeep Kumar, CEO of Union Asset Management Company, this can help Indian mutual funds raise money overseas to invest in India. The regulator has also decided to give flexibility to mutual funds to invest in unlisted nonconvertible debentures (NCDs) up to a maximum of 10% of the debt portfolio of the scheme subject to such investments in unlisted NCDs having simple structures.
The markets watchdog has also reviewed the norms for buybacks. While continuing with its current approach the company not breaching its equity ratio of 2:1 post buyback on standalone and consolidated basis, it has taken into account subsidiaries non-banking subsidiaries and housing finance companies (HFCs). At the consolidated level equity ratio would have to be 2:1 after excluding NBFCs and HFCs.