SEBI merges FIIs, sub accounts and QFIs into one single class FPI

(| 14/10/2013 03:11 PM | )
FII regulations prescribed by SEBI and QFI framework prescribed by both
SEBI and RBI would be required to be repealed and replaced by a new
framework for FPIs; amendments in FEMA and SEBI (ICDR) Regulations
Driven by the rationale of having an integrated policy on foreign investments,
SEBI videPress Release (PR No. 99/2013) on 5 October, 2013 conveyed the
approval of draft SEBI (Foreign Portfolio Investors) Regulations, 2013 (the
draft Regulations) in the Board meeting of SEBI. The draft Regulations intend
to merge all the existing FIIs, sub accounts and qualified foreign investors
(QFIs) into a new investor class termed as Foreign Portfolio Investor (FPI).
FPIs will be allowed to invest in all those securities, wherein foreign
institutional investors (FIIs) are allowed to invest.
In his Union Budget Speech for 2013-14, P Chidambaram, the Finance Minister,
quoted There are many categories of foreign portfolio investors such as FIIs,
sub-accounts, QFIs etc. and there are also different avenues and procedures for
them. Designated depository participants, authorised by SEBI, will now be free
to register different classes of portfolio investors, subject to compliance with
KYC guidelines
SEBI will simplify the procedures and prescribe uniform registration and other
norms for entry of foreign portfolio investors. SEBI will converge the different
KYC norms and adopt a risk-based approach to KYC to make it easier for
foreign investors such as central banks, sovereign wealth funds, university
funds, pension funds etc. to invest in India
The base of the draft Regulations has been (Foreign Institutional Investors)
Regulations, 1995, QFIs framework and the recommendations of the
Committee on Rationalisation of Investment Routes and Monitoring of Foreign
Portfolio Investments (the Committee Report) dated 12 June, 2013.
Authorised dealer category-I authorised by Reserve Bank of India, depository
participant and custodians registered with SEBI shall be authorised to as

designated depository participants (DDPs). DDPs shall register FPIs on behalf

of SEBI subject to compliance with KYC requirements. The registration
certificate shall be permanent in nature unless it is suspended or cancelled by
SEBI.
Though there is an integration of portfolio investors in to a single category
called FPIs, from KYC point of view, the Committee recommended for
catergorisation of FPIs based on the perceived risk profile. Subsequently, SEBI
vide CIR/MIRSD/07/2013, dated September 12, 2013 issued circular specifying
KYC requirements for these categories:
Category I:
Government and government related foreign investors such as
foreign central banks, governmental agencies, sovereign wealth funds,
international/ multilateral organisations/ agencies.
Category II: Appropriately regulated broad based funds such as mutual
funds, investment trusts, insurance/reinsurance companies, other broad based
funds etc.; Appropriately regulated entities such as banks, asset management
companies, investment managers/ advisors, portfolio managers etc; broad based
funds whose investment manager is appropriately regulated; university funds
and pension funds; university related endowments already registered with SEBI
as FII/sub account.
Category III: All other eligible foreign investors investing in India under PIS
route not eligible under Category I and II such as endowments, charitable
societies/ trust, foundations, corporate bodies, trusts, individuals, family offices
etc.
All the FIIs and sub accounts may continue to buy, sell or otherwise deal in
securities under the FPI regime. QFIs may continue to buy, sell or otherwise
deal in securities till the period of one year from the date of notification of this
regulation. In the meantime, they may obtain FPI registration through DDPs.
Category I and category II FPIs will be allowed to issue, or otherwise deal in
offshore derivative instruments (ODIs), directly or indirectly. However, the
FPI needs to be satisfied that such ODIs are issued only to persons who are

regulated by an appropriate foreign regulatory authority after

ensuring compliance with know your client norms.
The Committee report cited required amendments/ modifications that would be
needed in the legal framework viz. FII regulations prescribed by SEBI and QFI
framework prescribed by SEBI and the RBI would be required to be repealed
and replaced by a new framework for FPIs; amendments in FEMA (Transfer or
Issue of Security by a Person Resident Outside India) Regulations, 2000, SEBI
(ICDR) Regulations, 2009 etc.
In view of the same, one may expect series of amendments coming in near
future, along with issue of SEBI (Foreign Portfolio Investors) Regulations,
2013.