The expectation is that any changes suggested by the committee to the regulatory regime should be applied only prospectively.
Foreign Portfolio Investors (FPIs) invest in Indian capital markets in accordance with the regulations prescribed by the Securities and Exchange Board of India (SEBI). Over the years, FPIs have allocated a substantial portion of their corpus in emerging economies such as India. The increasing attractiveness of the Indian economy and Indian securities has resulted in a steady increase in the number of FPIs registering in India and the quantum of FPI investments in India.
The continued independence and transparency of the SEBI has also helped bolster investor sentiment towards India.
FPI regulations have been evolving over the years, and the SEBI has been addressing many of those issues as and when they arose. Recently, the SEBI and the Reserve Bank of India (RBI) have come out with several regulatory changes governing the FPI regime.
Some key ones include changes in Know Your Client (KYC) requirements for FPIs and restrictions on FPI investments in debt securities. The changes in KYC requirement, amongst others, provide a mechanism for identification of beneficial owner (BO) of FPIs and format for reporting of BOs.
It also clarifies that non-resident Indians (NRIs)/ Overseas Citizen of India (OCI) cannot be beneficial owners of FPIs. Many existing funds are examining how to comply with these set of requirements. FPIs or the investors should not have issued any bearer shares. If their constitution or home jurisdiction regulations permit such issue, the FPI should certify that they have not issued bearer shares.
Further, restrictions on debt investments, amongst others, include the introduction of single/ group investor-wise limits in corporate bonds, prohibition on majority participation in single issuance and revision of minimum residual maturity requirement. These changes have led to much hardship for FPIs. Investors are questioning how rules can be changed after they have committed funds to India and made investments in the country.
The SEBI has recently constituted a high-profile committee led by a former deputy governor of the RBI to redraft the regulations governing FPIs to address some issues more comprehensively. The committee aims to delve into multiple grey areas and ambiguities to present a new policy without altering the broader framework. This has FPIs worried regarding the new changes it will bring.
The expectation is that any changes suggested by the committee to the regulatory regime should be applied only prospectively. Existing structures should be grandfathered. The need for FPIs to go back to their investors to seek any additional information relating to past investments should be avoided. FPIs should be provided sufficient time to comply with the new changes, considering that their Indian investments may be a very small portion of their global investment portfolio.
The requirement of extensive documentation at the time of registration and the requirement to update them periodically strain their existing resources. Furthermore, authentication and registration costs are high. Confidentiality and privacy issues are of the highest priority. Grey areas in the regulations also create confusion for FPIs.
On the FPI regulations, more clarity on the definition of broad based fund will be welcome. For example, there are cases where a fund may not have 20 investors but one of the investors may be a university-related endowment registered as a FII in the erstwhile regulation and now a category II FPI. Such fund also should be treated as a broad based fund and should qualify for category II FPI. The clarity on individual and consolidated NRI investment in a fund will put to rest many questions that keep arising at the time of setting up the fund.
Recently, private banks were allowed to invest on behalf of their clients. However, it was quickly clarified that the client/investor or their BO should not be resident Indian/NRI or OCI. NRIs and OCIs are the ones who are likely to show interest in investing in India. If those set of investors are completely barred, the enabling of private banks to invest on behalf of their client is only a reform in paper.
The committee will do well to address these concerns. It will be great if it could adopt a consultative approach and seek comments from impacted stakeholders before making any recommendations. This will also help the SEBI meet the objective of rationalisation of regulatory regime by providing more clarity and ease to FPIs.
Investors certainly want to invest in India. However, ultimately, they must find a balance between pain and gain.The writer is Partner-Financial Service Tax, PwC India