What Sebi’s new norms mean for FPIs?

To simplify things for FPIs, Sebi collapsed 57 circulars on the norms into one.

Aug 27, 2019 10:08 IST India Infoline News Service

Sebi
Markets regulator Securities & Exchange Board of India (Sebi) overhauled foreign portfolio investor (FPI) norms last week in a bid to boost FPI inflows. The changes come at a time when FPIs are massively withdrawing from Indian markets. To put it in numbers, the Indian markets lost $3.2bn since July in FPI outflows.

The risk-averse environment owing to global uncertainty and the key trigger of FPI surcharge announced in the budget set off a selling spree that the markets are reeling under currently.

The Sebi in a proactive attempt to curb these outflows eased regulations for FPIs with a slew of revisions as mentioned below:

Broad-based criteria for institutional FPIs tweaked
Earlier, the broad-based eligibility criteria for institutional FPIs required them to have at least 20 investors with investment of not more than 49%. The Sebi removed this requirement, allowing the emergence of a new class of FPIs.

Further, government entities would now be allowed to register as FPIs, considering that the central banks are relatively long-term, low-risk investors directly/indirectly managed by the government. Those central banks that are not the members of BIS (Bank for International Settlement) will also be eligible for FPI registration.

Re-categorization of FPI categories
A key revision made was that of re-classification of FPI categories. The regulator has decided to re-categorise them into two categories i.e. I and II vs. 3 categories earlier. Thus, Category III will be eliminated.

With this, many institutional investors will now move to Category I, and after the broad-based criteria has been eliminated, consolidating them under one category seems rational and discards the need for a separate Category III. The registration process will also become simplified.

Further, Category II FPIs enjoy several benefits: FPIs in this category are considered as institutional investors and are eligible to participate in several assets which are otherwise not open to Category III FPIs or non-institutional investors. These FPIs can also make indirect transfers, which was not available to Category III FPIs.

KYC made simple
A significant change involved easing Know Your Customer (KYC) norms. Sebi has made documentation requirements for KYC much simpler, reducing duplicity and unnecessary processes.

Permitting offshore funds floated by domestic MFs
Further, Sebi has allowed offshore funds floated by domestic mutual funds to invest in India after registering as FPIs. The regulator now allows mutual funds to invest in unlisted nonconvertible debentures (NCDs) up to a maximum of 10% of their debt portfolio of the scheme subject to such investments in unlisted NCDs have simple structures.

ODI issuance and subscription eased
Another change is the easing of requirements for issuance and subscription of offshore derivative instruments (ODIs). According to experts, this has long been a topic of contention within the industry. Currently, the ODI business is strictly regulated to prevent unlicensed entities accessing the solely overseas instrument. Those who subscribe to ODIs face multiple restrictions such as being a regulated entity in their home jurisdiction.

Now, with the FPI route being broadened, the government probably has opened up doors for direct investors to come into the market and not do business via  ODIs. More clarity on ODIs is awaited.

Further, the Sebi said that entities established at the International Financial Services Centre (IFSC) would be considered to have met the jurisdiction criteria.

Besides these steps, Sebi also relaxed buyback norms for companies having non-banking and housing finance companies (HFCs) as subsidiaries to ease the stress in the beleaguered sector.

To simplify things for FPIs, Sebi collapsed 57 circulars on the norms into one. However, how smoothly the revisions are implemented remains to be seen.

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