India’s financial markets regulator, the Securities and Exchange Board of India, is moving towards foreign investment reforms aimed at rationalising existing rules that have proven complex and prone to loopholes.
SEBI decided late last year to prepare guidelines for the government. After government approval, SEBI and the Reserve Bank of India would create the regulatory framework. The committee subsequently arranged has just revealed its recommendations.
It recommends creation of one single route for what it officially defines as ‘Foreign Portfolio Investors’ (FPI) by merging the trio of the currently defined entry routes, ‘Foreign Institutional Investors (FII), ‘Sub Accounts’ and ‘Qualified Foreign Investors’ (QFI).
The committee recommended that FPIs would not be required to obtain direct registration with SEBI. Instead, designated depositary participants (DDPs) authorised by SEBI will register FPIs subject to a process of compliance and due diligence. DDPs would be banks with an international presence and be registered already at SEBI as custodians. After those preliminary acts have taken place, the overseas firms can make investments in Indian securities.
Access to Indian market has been a problem for international institutional investors for many years, and loopholes have existed which Indian regulators have sought to plug. For example in January 2012, rules were issued for direct investment in stocks by certain foreign investors, to curb a number of opaque structures which saw routing of funds by resident Indians via a window that they weren’t intended to use.
The committee felt that non-resident Indians presently have a fairly free route for accessing India’s securities market. Therefore they will continue to be viewed as a distinct market participant group enjoying certain investment privileges not available to foreign investors.
For early-stage investors, the ‘Foreign Venture Capital Investor’ (FVCI) regime applies. The committee decided that this has certain benefits such as non-applicability of pricing norms and a relaxation from post IPO lock-in requirements, which promote venture capital investments. Accordingly, the committee recommended that the FVCI procedure would continue and should be expanded to include more industrial sectors.