Convergence from FII to FPI: a Novel Sunrise for Professionals

Foriegn Investment into India

Foreign Investment in India can be made either in form of FDI and FPI. Under FDI, Non Resident (NR) can make investment in Indian Corporates to make it as Subsidiaries or Joint Venture after complying with FEMA, 1999 together with RBI circulars, rules and other regulations. For eg: Indian Oil Skytanking Limited, Joint Venture of Skytanking GmbH, Germany and IOT Infrastructure & Energy Services Ltd. Their Areas of operation is maintaining aviation fuel facility project, designing, construction. As a result of said investment, foreign investors can participate in the policy decisions/ control the investee Company in its operations. No Secondary Market investments, investment in Mutual Fund or Government Securities are allowed under FDI scheme.

On the other part, FPIs are allowed to make investment in stock market by adhering to the FPI Regulations and RBI rules & Regulations. Person who is making investment doesn’t have any control/ policy decisions in Investee Company’s management. For eg: Foreign Pension Fund Scheme making investment in India. Now let us understand the concept of FPI.

Foeign Institutional Investors (FII), Sub accounts and Qualified Foreign Investors (QFI)

FII means Institutional Investors incorporated abroad who proposed to invest in India has to register with SEBI after satisfying condition prescribed under Regulations. such registration procedure is cumbersome. So, small  retail foreign investors can't afford to such compliance including registration procedure. They have been given an alternative to open "sub account" with FII.

QFI allowed to invest in stock exchange without prior registration with SEBI. it was introduced in finance Act, 2008

In order to streamline the deficiencies, functioning and to pluck out money laundering in the area of Foreign Investment by Institutional Investors abroad, Securities and Exchange Board of India (‘SEBI’) has come up with new regulation being SEBI (Foreign Portfolio Investors) Regulations, 2019 (‘FPI Regulations’) w.e.f. September 23, 2019 by revoking erstwhile SEBI (Foreign Institutional Investors) Regulations, 1995 (‘FII Regulations’) and SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations, 2014”). With effect from this regulation, Indian Capital Market has got new class of investors namely Foreign Portfolio Investors (‘FPI’) and that the Foreign Institutional Investors (‘FII’), its Sub-Accounts & Qualified Foreign Investors (‘QFI’) had conglomerated with FPI.

The term “FPI” has been defined as under:

a person who has been registered under Chapter II of these regulations and shall be deemed to be an intermediary in terms of the provisions of the Act;

Provided that any FII or QFI who holds a valid Registration Certificate shall be deemed to be a FPI till the expiry of the block of three years for which fees have been paid as per the FII Regulations.

ELIGIBILITY CRITERIA FOR FPI

As per Regulation 4 of FPI Regulations, the applicant should inter-alia satisfy following eligibility criteria to become FPI which is enumerated as below:

Ø  The applicant should not be resident India including NRI and Overseas Citizen of India.

Ø  The applicant is resident of a country whose

o   Securities Market Regulator is a signatory to the International Organisation of Securities Commission’s (IOSC) Multilateral Memorandum of Understanding (MoU) or is a signatory to Bilateral MoU with SEBI.

o   Central Bank is member of Bank for International Settlements.

o   Jurisdiction has not been identified in public statement of Financial Action Task Force with any deficiencies/ warnings.

Ø The Applicant is legally permitted to invest in Securities outside the Country of its incorporation or establishment or place of business.

Ø The applicant should be authorised by the Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients.

Ø The applicant should have sufficient experience, good track record, professionally competent, financially good, good reputation with fairness and integrity.

TYPES OF FPI

Category I FPI

(i)          Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s); (ii)         Pension funds and university funds; (iii)        Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management  companies,  investment  managers,  investment advisors, portfolio managers, broker dealers and swap dealers; (iv)       Entities from the Financial Action Task Force member countries which are– · appropriately regulated funds; · unregulated funds whose investment manager is appropriately regulated and registered as a Category I foreign portfolio investor: · university  related  endowments of  such universities  that  havebeen  in existence for more than five years; (v)         An  entity · whose  investment  manager  is  fromtheFinancial  Action  Task Force  member  countryand such  an investment  manager  is  registered  as  aCategory I foreign portfolio investor;or · which is at least 75% owned,  directly  or  indirectly  by  another entity,eligible  under  sub-clause (ii), (iii)and (iv) above  and such an eligible  entity is from a Financial Action Task Force member country:

Category II FPI

shall include all the investors not eligible under Category I foreign portfolio investors such as (i)          appropriately  regulated  funds  not  eligible  as  Category-I FPI; (ii)         endowments and foundations; (iii)        charitable organisations; (iv)       corporate bodies; (v)         family offices; (vi)       Individuals; (vii)      appropriately regulated  entities  investing  on  behalf  of their client,  as  per conditions specified by the Board from time to time; (viii)     Unregulated funds in the form of limited partnership and trusts;

FPI REGISTRATION

A Person shall not buy, sell or otherwise deal (‘trade’) in securities as FPI unless it has obtained a Certificate granted by Designated Depository Participant (DDP). FII or sub-account may continue to trade in securities until the expiry of registration or until it obtains a Registration Certificate as FPI whichever is earlier subject to payment of conversion fees. Also QFI may continue to trade in securities for a period of 1 year from the date of commencement of FPI regulations or until it obtains a registration Certificate as FPI, whichever is earlier.

The FPI registration is granted by DDP who fulfils the eligibility conditions and on submitting the application along with requisite fees. If all requisite documents are in line, DDP will grant the Registration Certificate at the earliest which shall not exceed 30 days from the receipt of application or further information/ documents called for by the DDP. The Registration granted shall be permanent unless it is suspended or cancelled by the SEBI or surrendered by the FPI.

Application may be rejected by DDP due to non satisfaction of requirements under FPI regulations after giving reasonable opportunity of being heard. The aggrieved party may approach the SEBI for reconsideration of DDP’s decision within 30 days of receipt of communication about rejection of the application.

CONCLUSION

SEBI can now concentrate on core areas of its activities as it has delegated some of its power to DDPs particularly FPI registration. Every FPIs and DDPs are required to appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications etc. issued by SEBI or Central Government. Compliance officer shall also immediately and independently report to SEBI regarding any non-compliance observed by him. We, the professionals have scope of employment in this area.