By 12 June, 2013
SEBI to bring FIIs under new foreign portfolio investors category, retains separate identity for foreign venture capital investors

Market regulator Securities and Exchange Board of India (SEBI) is bringing various foreign investors under a new category of foreign portfolio investors (FPI) while making provision for separate know-your-client (KYC) guidelines for sovereign wealth funds and other asset managers.

This follows recommendations of the KM Chandrasekhar-chaired Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments, which submitted its report on June 12.

* Existing FIIs, sub accounts and qualified foreign investors (QFI) would be merged into a new investor class to be termed as FPI. The aggregate investment limit would be 24 per cent (being the present default aggregate limit for FIIs, which can be raised by the company up to the sectoral cap).

* It has retained the separate classification for investments from non-resident Indians (NRIs) and foreign venture capital investors (FVCIs). Therein, NRIs would continue to have individual investment limit of 5 per cent and aggregate investment limit of 10 per cent. In case of FVCI, the committee felt that the present list of nine sectors should be expanded and alternatively a negative list may be announced by the government so that the rest of the sectors are opened for venture capital funding activity.

FVCIs were earlier kept separate from the AIF norms which sought to bring all alternative investment funds under its three categories.

* In a significant move to make the procedure simpler, the committee has recommended that prior direct registration of FIIs and sub accounts with SEBI should be done away with. Instead, FPIs would be able to register themselves with and transact through designated depository participants (DDPs).

* Portfolio investments would be defined as investment by any single investor or investor group, which shall not exceed 10 per cent of the equity of an Indian company. Any investment beyond the threshold of 10 per cent shall be considered as foreign direct investment (FDI).

* The report has suggested a risk-based approach towards KYC norms and has recommended for categorisation of FPIs into three categories. The documents needed for registration and onboarding would be the simplest for Category I and the most stringent for Category III.

Category I (Low Risk) would include government and government related entities such as foreign central banks, sovereign wealth funds, multilateral organizations, etc.

Category II (Moderate Risk) would include regulated entities such as banks, asset management companies, broad-based funds such as mutual funds, investment trusts, insurance and reinsurance companies, university funds, pension funds and university related endowments already registered with SEBI.

Category III (High Risk) would include all other FPIs not eligible to be included in the above two categories.

* With regard to issuance of offshore derivative instruments (ODIs)/participatory notes (PNs), the committee has recommended that FPIs belonging to Category III shall not be allowed to issue ODIs/PNs. Further, FPIs that issue ODIs/PNs would continue to report directly to SEBI.

(Edited by Joby Puthuparampil Johnson)

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