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SEBI to extend timeline for FPI

SEBI (Securities Exchange of India) has decided to extend the timeline for implementing New Foreign Portfolio Investment (FPI) policy by three months i.e. by 30th June 2014 (instead of 31st March 2014).

The FPI shall come in action from 01st June 2014. Earlier FPI policies were notified by SEBI in January 2014 and were scheduled to be implemented from April 1, 2014.

The regulations, will replace the existing SEBI norms for Foreign Institutional Investors (FII) by FPIs, which will encompass all FIIs, their sub-accounts and Qualified Foreign Investors (QFIs).
As per SEBI it will continue to grant of registration as a FII or sub-account, under the SEBI (FIIs) Regulations Act 1995, till 31st March 2014.

Reason for extension

As per the market participants they were still working on the up-gradation of system and procedure to discharge their role efficiently.

Overview of investment in India

If an investor wants to invest in India he can invest it in two ways –

  1. By directly investing in the company, in which he would be the owner of the organisation or a partner. The purpose of investment is for a long term. Known as Foreign Direct Investment (FDI).
  2. The person can also invest in the company through brokers, for a short period of time. The main intention in this type of investment is to earn more returns in less time. This type of investors includes FII, QFI etc.

Indirect investment in India is in the form of Foreign Institutional Investment (FII).

The second type of investment are like fair weather friends, who invest at the time of boom or when they get good return and take away their funds when the situation is not good or there is less profit in the transaction.

Recently, SEBI have changed the norms in which all such secondary investors like FII and OFI will be converted into FPI.

About FII and QFI

Foreign Institutional Investment (FII)

The Institutional investors are organizations which pool large sums of money and invest those sums in securities, real estate and other investment assets.

Typical investors include banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds.

These institutions are registered with SEBI under SEBI (Foreign Institutional Investors) Regulations, 1995.

In other words, FII are the agency or group which invest on behalf of investors in the stock exchange. They operate under the license issued by SEBI by paying fees for registration. Once they have received the license they can invest in the stock market on behalf of their customer. The customer needs to open a sub-account with the agency, which will be investing on customers behalf. The group also provides investment tips to the customer or they work as per the customers wish in which he needs to invest. The agency charges the customer for the service which he had provided.

In FII, the customer was not allowed to invest directly in the market as an individual; instead he had to invest the money as an institution or a group as per the SEBI guidelines.

This was one of the reasons, due to which investors were not attracted towards India for Investment. To overcome this issue, QFI was started.

Qualified Foreign Investors (QFI) –

Under QFI foreign individual, group or foreign firm can directly invest in Indian stock-market like any normal Indian citizen, without requiring the sub-account with FII.

The purpose behind QFI was to attract the investors who are interested to invest in India, but was not investing due to the sub account and strict net worth rules.

For being a QFI a person needs to fulfill the following criteria

  • He must be the resident of the country which is the member of the Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and
  • He must be the resident of the country which is the signatory of IOSCO’s (International Organization of Securities Commissions) MMOU – or a signatory of a bilateral MOU with Securities and Exchange Board of India (SEBI).
  • The total shareholding by a QFI cannot exceed 5% of the paid up equity capital of the company.
  • A person can be treated as QFI, if he is residing in the following countries
Argentina

Finland

Ireland

Russian Federation

Australia

France

Italy

Singapore

Austria

Germany

Japan

South Africa

Belgium

Greece

Republic of Korea

Spain

Brazil

Gulf Co-operation Council

Luxembourg

Sweden

Canada

Hong Kong, China

Mexico

Switzerland

China

Iceland

Netherlands

Turkey

Denmark

India

New Zealand

United Kingdom

European Commission  

Norway

United States

   

Portugal

 

New FPI Regulations

FPI = (FII) + (QFI)

The new guidelines are designed to attract the investors by streamlining the registration and operational procedures.

The new regulations will divide FPI into 3 categories –

  1. As per their risk profile
  2. Know Your Client (KYC) Requirement
  3. Other registration procedures

Categories

The Category – I – It is a lower risk category and is estimated to have nearly 40 entities. It includes foreign governments and government related foreign investors.

Category – II – This category will have approximately 8700 investors. It includes appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds, university related endowments and pension funds, etc.

Category – III – FPIs include all others not eligible under the first two categories. It includes charitable trust, Societies, Individuals, Corporate bodies etc.

All existing FIIs and sub-accounts would need to convert themselves into FPIs under the new regime after payment of certain fees, while new FPIs would have to pay applicable registration charges. This will also turn as an increase in the income source of SEBI.

SEBI has decided to grant them a permanent registration, as against the current practice of granting approvals for one year or five years to the overseas entities seeking to invest in Indian markets. They will be permanent unless suspended or cancelled by the board or surrendered by the FPI.

All FPI needs to obtain a certificate from Designated Depositary Participant (DP) along with the payment of fees. The certificate needs to be issued by the DP within 30 days from the date of application received.

All FII and QFI’s needs to pay the fees and get themselves converted to FPI.

Eligibility for FPI

A person who is non resident of India as per the Income tax Act 1961 and is allowed to invest in securities outside his country.

The applicant is a resident of a country, which had a bilateral MoU with SEBI.

In case of Bank, the Central bank of that country needs to be the member bank for international settlements.

In case of rejection, reconsideration of decision can be done by sending the application within 30 days of rejection to SEBI.

Some important terms

Regulated by – Securities market regulators / banking regulators / concerned foreign jurisdiction.

Broad Based Fund – Funds established/ incorporated outside India with at least 20 investors and no single investor should have more than 49% holding.

Appropriately regulated persons – e.g. Banks, Asset Management Co, Portfolio Managers etc.

The International Organization of Securities Commissions (IOSCO) is an association of organisations that regulate the world’s securities and futures markets. The organisation’s role is to assist its members to promote high standards of regulation and act as a forum for national regulators to cooperate with each other and other international organisations.

Financial Action Task Force (FTAF) – It is a policy making body which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

The objective of FTAF is to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

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