SEBI relaxes foreign investment norms; a new category Foreign Portfolio Investors (FPIs) approved

In a bid to attract a larger number of foreign investors to Indian capital markets, SEBI approved a slew of changes. Among the major changes are simplification of registration and compliance requirements for foreign investors.
As per new measures:

• A new category Foreign Portfolio Investors (FPIs) has been approved; it blends various classes of investors such as FIIs, their Sub Accounts and Qualified Foreign Investors (QFIs) to set up a simplified and uniform set of entry norms for them.
• Recommendations of K M Chandrasekhar Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments’.
• Any portfolio investments would be defined as investment by any single investor or investor group, which shall not exceed 10% of the equity of an Indian company. Investments beyond this threshold of 10% will be considered as FDI.
• With the aim to make the entry norms easier, SEBI has also approved eliminating the current practice of FIIs and their sub-accounts requiring a prior direct registration of the regulator to operate in Indian markets.

In addition, SEBI would adopt a risk-based KYC (Know Your Client) approach in dealing with the overseas investors. It includes FPIs to be divided into three categories which are:

1. Low-risk (for multi-lateral agencies, government and other sovereign entities): This category will have simplest KYC requirements, not required to submit personal identification documents.
2. Moderate risk (for banks, asset management companies, investment trusts, insurers, pension funds and university funds), not required to submit personal identification documents.
3. High-risk (all the FPIs not included in the first two categories): This category FPIs would not be allowed to issue Participatory Notes and will have most stringent KYC requirements

Note: These measures have been introduced at a time when the rupee has depreciated considerably against the dollar reaching an all time low recently. Also, FIIs have been pulling out money from the Indian debt market, which has resulted in the hardening of yields on government bonds.

Month: Current Affairs - June, 2013