The SEBI (Foreign Portfolio Investors) Regulations, 2014: What’s New?

by Mr. Jayant Malik, B.A., LL.B. (Hons.) 2009, JGLS

The SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”) came into effect on January 7, 2014, repealing the SEBI (Foreign Institutional Investors) Regulations, 1995 and rescinding the Securities and Exchange Board of India (“SEBI”) Circulars issued on Qualified Foreign Investors (“QFI”). It covers the registration of foreign portfolio investors and provides an operating framework for overseas institutional investors.

The most significant change that has taken place is the creation of a new class of investors known as Foreign Portfolio Investors (“FPI”) which encompasses Foreign Institutional Investors (“FII”), their sub-accounts and QFIs.

FPIs have been divided into three categories in Regulation 5 of the FPI Regulations. Category I FPIs include governments and government-related entities such as central banks, government agencies, sovereign wealth funds or multilateral organizations or agencies. Category II FPIs include regulated broad-based funds and persons, unregulated broad-based funds whose investment managers are appropriately regulated, university and pension funds and university-related endowments already registered with SEBI as FIIs or sub-accounts. Category III FPIs includes other investors who do not fall within Category I or II.

The second change is in the eligibility criteria for FPIs given under Regulation 4 of the FPI Regulations. In addition to the requirements to be fulfilled under the FII Regulations, 1995, Regulation 4 of the FPI Regulations has included the following criteria for an applicant to fulfil in order to be eligible as an FPI:

• The applicant should be a resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A signatories) or a signatory to a bilateral Memorandum of Understanding with SEBI.
• If the applicant is a bank, it should be a resident of a country whose central bank is a member of the Bank for International Settlements.
• The applicant should not be a resident in a country identified in the public statement of Financial Action Task Force as,
• A jurisdiction having strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or,
• A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

In addition, Regulation 4 of the FPI Regulations provides that all applicants must be legally permitted to invest in securities outside the country of their incorporation, establishment or place of business (a requirement which was earlier confined to university funds, endowments, foundations and charitable trusts).

Regulation 21 of the FPI Regulations specifies that, in addition to the securities and derivatives that FIIs were permitted to invest in, FPIs are permitted to invest 

• Treasury bills
• Rupee denominated credit enhanced bonds
• Security receipts issued by asset reconstruction companies
• Perpetual debt instruments and debt capital instruments, as specified by the RBI from time to time
• Rupee denominated bonds or units issued by infrastructure debt funds
• Indian depository receipts
• Such other instruments specified by the Board from time to time

The FPI Regulations have been enacted with the aim of simplifying the entry of foreign investors into India. The FPI Rules are expected to come into effect from June 1, 2014 which would further clear the air on any doubts about FPIs in India.

The increase in the number of instruments that FPIs can invest in is expected to encourage investors to view India as a country that is foreign investor-friendly.