The Securities and Exchange Board of India (SEBI) notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI regulations), on 7 January. The FPI regulations repeal the SEBI (Foreign Institutional Investors) Regulations, 1995 (FII regulations).
Under the FPI regime, SEBI has harmonized FIIs, sub-accounts and qualified foreign investors into a single investor class – foreign portfolio investors. It has also provided a single window clearance through designated depository participants.
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Categorization of FPIs
From the point of view of know-your-customer (KYC) requirements, the FPI regulations provide the following categories of FPIs based on their perceived risk profile.
Category I: Government and government-related investors such as central banks, governmental agencies, sovereign wealth funds, international and multilateral organizations and agencies.
Category II: (i) Appropriately regulated broad-based funds including mutual funds, investment trusts, and insurance and reinsurance companies; (ii) appropriately regulated persons including banks, asset management companies, investment managers and advisers, and portfolio managers; (iii) broad-based funds that are not appropriately regulated, provided that the fund’s investment manager is regulated and undertakes responsibility for the fund’s actions and omissions; (iv) university funds and pension funds; and (v) university-related endowments already registered with SEBI as FIIs or sub-accounts.
Category III: All eligible FPIs that are not eligible under category I and II, such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
The FPI categorization follows the risk-based KYC regime set out in SEBI’s circular dated 12 September 2013 for foreign investors investing under the portfolio investment scheme.
Changes in broad-based criteria
The FPI regulations continue to follow the broad-based criteria with two notable deviations: (1) in order to satisfy the broad-based criteria, a fund must have 20 investors, even if it has an institutional investor; (2) in order to calculate the number of investors in a fund, both direct and underlying investors (i.e. investors of entities that are set up for the sole purpose of pooling funds and making investments) will be counted.
Investment limits
Regulation 21(7) of the FPI regulations states that a single FPI or an investor group can purchase below 10% of the total issued capital of a company. Under the FII regulations such a shareholding was not to exceed 10% of the share capital. Thus, a single FPI can now hold up to 9.99% of the share capital of an Indian company.
The FPI regulations state that if the same set of ultimate beneficial owners invests through multiple FPI entities, those FPI entities will be treated as part of the same investor group and the investment limits of all such entities will be clubbed together at the investment limit as applicable to a single FPI.
Offshore derivative instruments
Regulation 22 of the FPI regulations provides that category I and category II FPIs (which are directly regulated by an appropriate foreign regulatory authority) are permitted to issue, subscribe to and otherwise deal in offshore derivative instruments (ODIs). However, category II FPIs which are not directly regulated (which are classified as category II by virtue of their investment manager being appropriately regulated) and all category III FPIs are not permitted to issue, subscribe to, or deal in ODIs. SEBI is yet to provide clarity on the meaning of “appropriate foreign regulatory authority”.
Opaque structures
SEBI recently clarified that entities that apply for registration under the FII regulations will not be regarded as having an opaque structure if they are required by their regulator or under any law to ring-fence their assets and liabilities from other funds or sub-funds in the entity. This position has evolved further under the FPI regulations. As long as: (a) the applicant is regulated in its home jurisdiction; (b) each of the applicant’s funds or sub-funds satisfies the broad-based criteria; and (c) the applicant agrees to provide information regarding its beneficial owners upon SEBI’s request, the applicant will not be regarded as having an opaque structure.
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