SEBI to review rules for foreign investors, listing of start-ups at board meet

The Securities and Exchange Board of India (SEBI) is likely to approve key recommendations of the HR Khan Committee on rules for foreign portfolio investors (FPIs) at the coming board meet, a source familiar with the matter told Moneycontrol.

The committee had been set up to consolidate, simplify and liberalise rules relating to FPIs.

Also, the regulator is expected to review rules for innovators growth platform (IGP) on which start-ups are listed.

The recommendations of the Khan Committee on FPIs include fast-tracking the registration process for select category II FPIs.

FPIs in this category include broad-based funds such as mutual funds, investment trusts, insurance/reinsurance companies, banks, investment managers/ advisors,  and portfolio managers.

The Khan Committee report says: “In order to bring efficiency in the FPI on-boarding process and speed up the time taken, it would be useful to design a fast track procedure on the basis of a risk-based approach for select types of institutional investors like public retail funds, which are diversified in nature and are generally considered as a stable class of investors. And benefits of fast track registration and KYC process may be extended to such applicants along with FPIs investing on a long term basis only under voluntary retention route (VRR) notified by RBI.”

Another measure recommended is simplified registration for Multiple Investment Manager (MIM) in which the same legal entity obtains multiple registrations. For registration of additional accounts under the MIM structure, requisite information including KYC details would already be available in the system. And the PAN would remain the same. So the entity will not be required to provide the registration and KYC-related details for subsequent registrations. This will substantially reduce registration timelines for additional accounts under MIM structure if such documentation requirement is eliminated.

The committee has further suggested that pension funds be considered as Category I foreign portfolio investor. At present, category I FPIs include government and government-related investors such as central banks, governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.

Pension funds right now fall under category II. However, the committee feels that pension funds are low-risk investors with a long term investment horizon and so can be treated as Category I.

The reclassification of investment from FPI to foreign direct investment, following the circular in December last year, is something that many foreign investors are unhappy with. According to the circular “In case total holdings of an FPI taken together with the investor group increases to 10% or more of the total paid-up capital in listed equity, the FPIs shall have the following options: a) The said investments shall be treated as Foreign Direct Investment (FDI) from the date of breach, or, b) FPI in breach shall have to divest its holding within five trading days from the date of settlement of trades to bring its shareholding below 10% of the paid-up capital of the company”.

However, this classification of FDI is in conflict with Foreign Exchange Management Act (FEMA) guidelines which permit FDI purchase of a listed stock on the floor of exchange only if the entity has already acquired control of such company (as per SEBI (SAST) regulations 2011), and continues to hold such control. The committee feels it may be necessary to provide a framework under which FPI will declare its intention to become a strategic FDI investor to the Designated Depository Participants (DDP) who, in turn, will inform SEBI & RBI accordingly.

"The recommendations made under the HR Khan Report majorly dealt with liberalization and simplification of the FPI regime whilst specifically highlighting the need for relaxing the FPI registration and KYC norms. The same should be implemented and would be a step in the right direction. Certain aspects like further easing the broad basing requirement and relaxing the restrictions on NRI participation in FPI vehicles though not recommended in the report, have also been high on FPI wish-list and should be considered," Tejesh Chitlangi, Senior Partner, IC Universal Legal, said.

Apart from this, the SEBI board may take up the innovators growth platform (IGP) proposal for discussion. SEBI may give a chance to companies that have completed a year on IGP, to be listed on the main board of the exchange.

Another point on the agenda would be to make it easier for credit rating agencies to get information from banks and other financial institution, on loan defaults by companies. Currently, banks don’t give such information to rating agencies citing the confidentiality clause with signed with the companies to whom they have given loans.

SEBI plans to propose that rating agencies take consent to get information relating to loan repayment from banks or financial institutions at the time of signing contract for rating. Rating agencies have been complaining that they don't get information on defaults by the companies they rate unless the companies themselves announce it publicly, or the lenders announce it.

Also on the agenda will be norms for easier buyback of shares by listed companies, especially those having subsidiaries in housing finance and NBFC sectors.