De-Coding QFI Regime In India

By: Pankhuri Sharma, Dr. Ram Manohar Lohiya National Law University & Rushab Dhandokia, Institute of Law, Nirma University

Introduction The first day of this year-January 1, 2012 should be declared as QFI Day in our country. It is the day when Ministry of Finance (hereinafter referred to as Ministry) vide its press note [1] permitted QFIs to invest directly in Indian Equities Market. Prior to this circular QFIs were allowed to invest in India but only in the Mutual Fund segment [2]. Having received the licence to invest directly into equities market means QFIs can themselves select the scripts they wish to invest in, unlike investing in Mutual Funds, where the fund chooses the scripts in which the money is to be invested. Decoding the birth of QFIs in the country There is an interesting episode behind having this new class of investors. We all know that since the 1991 liberalization policy various modes of investments were made available to the foreigners. These include the foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) investment, overseas corporate body (OCB) investments and later the foreign venture capital investments (FVCI). Having these number of class of investors lead to overlapping of regulatory regime governing them. Also the availability of multiple routes caused uncertainties to foreign investors when it came to opting for the appropriate investment route to adopt in order to invest in India. To address these issues the Working Group on Foreign Investments in India published a report [3] on 30 July, 2010. Inter alia the report recommended consolidating the above mentioned group of investors into one class that shall be called- QFIs. Interestingly, what actually was done is that QFIs were introduced in addition to the existing class of investors. Thus inspite of acting on the recommendation to consolidate them, the Ministry went on to introduce an additional route to invest in the country. Thus this marked the opening of QFIs in the country. Why QFIs inspite of having a slew of other class of investors? The reasons to add another class of investors as stated by the Ministry are- a) To widen the class of investors,
b) Attract more foreign funds,
c) To reduce market volatility and,
d) To deepen Indian Capital Market.
It should be remembered that prior to this only FIIs/sub accounts and NRIs were permitted to invest in Indian Equity directly. With this backdrop, the authors through this write up aim at- a) Deciphering regulatory framework governing QFIs. (This shall cover all the circulars issued till date by SEBI and RBI.)
b) Investment ceilings applicable to QFIs
c) Further Developments a) Deciphering regulatory framework governing QFIs. SEBI regulates QFIs in the country. Two [4] important circulars have been issued in this regard by the regulator. Eligibility- A person who is a: (i) Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and
(ii) Resident in a country that is a signatory to IOSCO’s MMOU or a signatory of a bilateral MOU with SEBI. Following points shall be remembered- a) FII/sub account or FVCI are not qualified as QFIs.
b) Prior to having QFIs, NRIs invested through the Portfolio Investment Scheme. After having QFI as a new route, NRIs can invest through QFI route provided that he closes all his existing demat accounts. Essentials for operating as QFI in Indian Equity Market- 1. Open a demat account with SEBI registered Qualified Depository participant (hereinafter referred to as QDP), wherein the equity shares would be held. It is only through this account that QFI can purchase or sale equity shares. 2. Trading Account-A QFI can open trading accounts with one or more SEBI registered stock brokers. A QFI can directly interact with a stock broker provided certain conditions are met, but, it cannot directly place order with a stock broker, the order is to be placed via QDP. 3. Open single non-interest bearing Rupee Account with an AD Category- I bank in India. This is an amended provision vide SEBI’s 7th June, circular. In the previous circular (January 14th), QFIs were allowed to invest only through the rupee pool bank account of their QDP [5]. This was not appreciated by the QDPs as it put an onus of withholding tax on them which thereby created a huge liability risk. This amendment provides a significant comfort to the QDPs who were previously highly apprehensive about how to deal with the withholding obligation as each QFI depending on the jurisdiction they were coming from would be subject to a different withholding rate. 4. QDP to ensure that the QFI has a designated oversea bank account and all the transactions are routed through this account itself.
5. Submit relevant documents to QDP for obtaining PAN. Ambiguity over the 5 day rule- Rule 9.1.3 of the January circular clearly and strictly envisages that in case if no investments were made within 5 days, of the money remitted in the Indian Rupee Account of the QFI, the shall be remitted by the QDP in the overseas bank account of the QFI. This was seen as a serious hindrance for both- (i) for QDPs, it was an administrative hassle as they were responsible for ensuring that the money is immediately remitted back to the designated overseas account of the QFI after five days and
(ii) For QFIs, as they became highly prone to the exchange rate fluctuations. In order to dispense with this 5 days rule, the Ministry issued a Press Release [6], allowing the QFI to have the freedom to retain the amounts in the account in India. However, SEBI in its June circular has incorporated all the recommendations made by the Ministry but it is silent over this 5 days rule. b) Investment ceilings on QFIs SEBI [7] and RBI [8] allowed QFIs to invest directly in the equity share capital of the listed companies on 13th January, 2012. However, the SEBI circular says that the total shareholding by an individual QFI cannot exceed five percent of the paid up equity capital of any Indian company at any point of time. This investment limit shall be applicable to each class of equity shares having separate and distinct International Securities Identification Number (ISIN). Further, the aggregate shareholding of all QFIs in an Indian company shall not exceed ten percent of the paid up equity capital of that company at any point of time. When the aggregate shareholding of all the QFIs in a company reaches 8% of the equity paid up capital, company's name with ISIN shall be published in the caution list by the depositories after which no fresh purchases shall be allowed without prior approval of the depositories. c) Further Developments As mentioned above, way back in 2010 the Government instead of simplifying the portfolio investment route, made it more complicated. But now the urge to have a harmonized portfolio investment route is back. In a board meeting [9] held on 6th October, 2012, SEBI has decided to prepare a draft guideline based on the guidance of the Working Group on Foreign Investment in India (WGFII), for consideration of the Government so that uniform guidelines are made for various categories of investors such as FII, FVCI, NRI, QFI etc.  Though there is no deadline for the drafting of guideline, it can be said that, the role of RBI would be inevitable for the implementation of the guideline. Conclusion It is easier said than done. To harmonize the portfolio investment route and bring all class of foreign investors under one umbrella is a good thought but not practical. Reason being each class of foreign investor is defined differently.  Hence each one of them makes decision to invest in the country with respect to the domain that they fit in. For e.g. FIIs include HNIs, large listed corporates and institutional investors whereas QFIs include “person” as defined under Section 2(31) of Income Tax Act, 1961. FIIs therefore, are much bigger players than QFIs and so stringent compliances need to be placed for them then what would be required for QFIs. Similarly, recently the Ministry has announced to do away with PAN requirement for QFIs, but can we dare to do away with the same for FIIs? According to the latest statistics FIIs have invested worth Rs.522.67 billion [10] from January to July, 2012 in equity sector whereas QFIs brought in investments in the equity sector worth Rs 41crores [11] from January to 2nd November, 2012. With these facts would to mantra of one size fit all sustain? Would it be practical enough to frame the same policies for the elephant and the ant? Disclaimer: The views expressed here are those of the author and do not represent the views of The Firm, its host channel CNBC TV18, the owner Network 18 or this website and/or any related parties. The student has vouched for his/her identity and the authenticity of the article. We have not conducted independent verification of the same. This website is not responsible for misrepresentations. In case of any anomalies/errors/complaints you can write to us at thefirm@in.com [1] http://pib.nic.in/newsite/erelease.aspx?relid=79306
[2] http://www.sebi.gov.in/circulars/2011/cirimddf14-2011.pdf
[3] http://finmin.nic.in/reports/WGFI.pdf
[4] http://www.sebi.gov.in/cms/sebi_data/attachdocs/1326453304731.pdf- issued on January 14, 2012 and http://www.sebi.gov.in/cms/sebi_data/attachdocs/1339064114781.pdf- issued on June 7, 2012
[5]  Rule 7.9 of the January circular.
[6]  http://finmin.nic.in/press_room/2012/Rational_QFI_Scheme.pdf
[7] Vide Circular No. CIR/ IMD/FII&C/3/2012
[8] Vide Circular A. P. (DIR Series) No. 66
[9] http://www.sebi.gov.in/sebiweb/home/detail/24571/yes/PR-SEBI-Board-Meeting
[10] http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=all
[11] https://nsdl.co.in/nsdlnews/Investment-QFIs.php