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Will SEBI's QFI Norms Curb Inflow Of Black Money?

16 January, 2012

Indian securities market regulator SEBI on Friday announced norms for qualified foreign investors (QFIs) that seek to put in place a hygiene factor while allowing foreign individuals to invest directly in Indian stock market.

To widen the class of investors and deepen financial markets in the country, India had opened local market to foreign investors to participate directly from January 1 with some basic know-your-client (KYC) requirements. Now it has prescribed some conditions that need to be followed.

Eligibility & Conditions:

The eligible transactions for QFIs would include purchase of shares of Indian firms either in a public issue or through the stock market, sale of such shares in the market, participation in rights issues, bonus shares, stock split, corporate amalgamations or demergers, receipts of dividends, open offer and buybacks.

The QFI can open only one demat account with a depository participant (SEBI has mentioned separate eligible criterion for DP), who will have to ensure compliance and also perform KYC due diligence for QFIs (or for each of the joint holders of the account). Cases where the ownership is not clear would not be allowed to invest through QFI route.

The DP is also to ensure that the same set of ultimate/ end beneficial is not allowed to open more than one demat account as QFI and the person registering as such is a non resident. However, a QFI can open trading accounts with one or more SEBI registered stock brokers. The DPs shall open a separate single rupee pool bank account with a designated bank for transactions and ensure that funds of each and every QFI in the rupee pool account are clearly segregated from each other. DPs are also to maintain appropriate records including audit trails on an ongoing basis regarding such segregation.

Moreover, the DP shall ensure that every QFI transacts only through one designated overseas bank account. It has also stated such banks should be in countries which are compliant with FATF standards and is a signatory to MMOU of IOSCO. The QFIs have also been asked to obtain a permanent account number (PAN).

SEBI has also stated that QFIs would only be allowed to invest through transactions involving taking and giving delivery of shares purchased or sold and no issue of offshore derivatives instruments/ participatory notes(as in the case of FIIs) takes place.

Holding Limits:

Holding of each QFI in a company is restricted at 5 per cent with a hard cap at 10 per cent for all QFIs put together in a firm. When the aggregate shareholding of all the QFIs in a company reaches 8 per cent of any company that firm’s name shall be published in the caution list by the depositories and no fresh purchases shall be allowed without prior approval of the depositories. This in turn means a listed firm cannot be run by a set of foreign individual promoters.

Whenever the aggregate shareholding of the QFIs exceeds the limit of 10 per cent, the QFI due to whom the limit is breached shall mandatorily divest excess holdings within three working days.

The stock exchanges have been asked to amend their listing agreement on or before June 30, 2012, to incorporate another class of investor to disseminate QFI shareholding in equity shares.

Moreover, the exchanges are to develop a separate segment for intra QFI transactions in the equity shares of companies in the caution list, if they wish to buy without the prior approval of depositories.

What Does This Mean?

The basic objective to broaden the class of investors participating in India will certainly be met through the QFIs. But the big question is, has SEBI set enough procedures to ensure that the route is not used by Indians who have parked black money abroad to bring it back home through a legal channel.

The norms puts almost all the onus of ensuring this doesn’t happen in the hands of depositories. Will some depositories risk liabilities of not ensuring proper due diligence with the huge sums of money a QFI might bring as a fee, is something we would need to watch out for.

Another poser is what if the DP is part of a financial services business group and the promoter himself is trying to bring back his own cash stashed illegally abroad. Will the present system be able to curb it? 


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Will SEBI's QFI Norms Curb Inflow Of Black Money?

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