FinTechSecurities LawForeign Portfolio Investors in India: in Light of Recent Amendments

INTRODUCTION

Investors making investment in financial assets outside one owns country is known as Foreign Portfolio Investors (“FPIs”). The investment is usually made in the form of stocks, bonds, exchange-traded funds (“ETFs”), global depository receipts (“GDRs”) and mutual funds.

The FPI helps in enhancing efficiency of the stock market and in maintaining a balance between the value and the price of a stock. Emerging economies around the globe has shown that the countries, which has shown higher potential for growth, has witnessed a high level of participation by foreign investors.

Furthermore, in the recent years, Foreign Portfolio Investment has grown to be a substantial source of funding for Indian businesses. More than $26 billion in Indian shares and $14 billion in debt securities were purchased by Foreign Investors in 2021.

Therefore, in order to increase the foreign investment in India, the Securities and Exchange Board of India (“SEBI”) has introduced an assortment of changes to liberalize FPI regulations in India.

In this article, we attempt to discuss what is Foreign Portfolio Investment, What are the recent amendments introduced by SEBI and what will be its impact on the Indian Economy.

FOREIGN PORTFOLIO INVESTMENT ROUTES IN INDIA

Foreign portfolio investments in India can be made through various routes. However, the three main routes for FPIs are:

1. Foreign Portfolio Investors (FPIs):

FPIs are registered with SEBI and can invest in Indian securities as per the regulations prescribed by SEBI. FPIs are mainly divided into 2 categories,  Category I and Category II FPIs.

2. Qualified Foreign Investors (QFIs):

QFIs are individuals, groups, or associations who are not resident of India but are qualified to invest in Indian mutual fund schemes. QFIs were introduced in 2012 to provide a route for small investors to invest in Indian markets.

3. Foreign Venture Capital Investors (FVCIs):

FVCIs are registered with SEBI and can invest in Indian companies engaged in specific sectors. Investments by FVCIs are subject to various restrictions and regulations as per SEBI guidelines.

Investors resident outside India can make investments under the FVCI route pursuant to registration with SEBI under SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI Regulations”).

CATEGOIRES OF FOREIGN PORTFOLIO INVESTORS

Prior to the 2019 Regulations, there were three categories of FPI, namely Category I, Category II and Category III. The However, in order to streamline the regulation, the SEBI vide 2019 Regulations reclassified these categories into Category I and Category II.

Category I

a. Low Risk:

This kind of FPI includes government/government-related establishments like central banks and international agencies, amongst others. For example sovereign wealth fund or an SWF which is a fund owned by the state or its divisions.

b. Moderate-risk:

These funds are broadly those which are appropriately regulated, or whose investment manager is appropriately regulated. This includes mutual funds, insurance/reinsurance firms, investment trusts, banks, and pension funds, Asset Management Companies, investment managers/advisors, portfolio managers, broker dealers and swap dealers, University funds, amongst others.

Category II or High-Risk

This type of foreign portfolio investment includes all other FPIs that don’t fall under the first category, such as, Endowments, Charitable societies, Corporate bodies, Trusts, Family offices, Individuals among others. Non-resident Indians (NRIs) are not permitted to register as FPIs, however they can invest in FPIs, subject to conditions.

THE AMENDMENT

The SEBI brought into effect the SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2023 (“Regulation, 2019”) from March 15, 2023.

The following are the amendments brought in the FPI Regulations 2019:

A. General obligations and responsibilities of FPIs

1. Under Regulation 22(1)(b) of the Regulation, 2019, prior to the amendment, the FPI was supposed to immediately inform the Board and DPP in writing, if any information or particulars previously submitted to the Board or DDP were found to be false or misleading, in any material respect.

However, now the update can be given within a period of Seven working days.

2. Under Regulation 22(1)(c) of the Regulation, 2019, prior to the amendment, the FPI was supposed to immediately inform the Board and DPP, in case of any material change in the information previously furnished in the information including  any  direct  or  indirect  change  in  its structure  or  ownership  or  control  or  investor  group previously.

However, now the update can be given within a period of Seven working days.

3. Under Regulation 22(1)(e), of the Regulation, 2019, prior to the amendment, the FPI was supposed to immediately inform the Board or the DDP, in case of any penalty, pending litigation or proceedings, findings of inspections or investigations for which action may have been taken or is in the process of being taken by an overseas regulator against it.

However, now the update can be given within a period of Seven working days.

4. Under Regulation 22(5) of the Regulation, 2019, prior to the amendment, the FPI was supposed to immediately inform the Board or the DDP, in case of any direct or indirect change in structure or common ownership or control of the foreign portfolio investor,

However, now if there is any direct or indirect change in the structure or common ownership or control of the investor group, the same has to be informed to the board and the update can be given within a period of Seven working days.

B. Obligations and responsibilities of DDPs

1. Under Regulation 31(1)(b) of the Regulation, 2019 prior to the amendment, the DDP was supposed to immediately inform the Board, in case any information or particulars previously submitted are false or misleading in any material respect.

However, now the update can be given within a period of Two working days.

2. Under Regulation 31(1)(c) of the Regulation, 2019, prior to the amendment, the DDP was supposed to immediately inform the Board in writing, in case there is any material change in the information furnished.

However, now the update can be given within a period of Two working days.

3. Under Regulation 31 (1)(g) of the Regulation, 2019, prior to the amendment, the DDP was supposed to immediately inform the Board, in case of any penalty, pending litigation or proceedings, findings of inspections or investigations for which action may have been taken or is in the process of being taken by an overseas regulator against it.

However, now the update can be given within a period of Two working days.

THE IMPLICATION

The Amendment Regulations ensures SEBI can closely monitor the FPIs’ actions and guarantees system-wide transparency. However, there are still significant regulatory gaps that could cause problems with respect to disclosures and FPIs’ general operations.

According to the amended Regulation 3(2) of the FPI Regulations, FPIs must now submit applications for issuance of certificates to DDPs in the “manner” specified and along with the “documents” prescribed by SEBI and the government. The government and/or the market regulator are yet to issue any such directives or documentation requirements to accompany the amended Regulation 3(2).

Furthermore, an exhaustive definition of “material change” is not given in either the FPI Regulations 2019 or SEBI’s Master Circular for FPIs, DDPs, and EFIs (Master Circular) of 2022.

Both the FPI Regulations and the Master Circular provide a broad definition of the term material change which includes, any direct or indirect change in the structure, ownership, or control, change in regulatory status, merger, demerger, or restructuring, change in category, subcategory, jurisdiction, name of FPI, or beneficial ownership. This leaves room for investors and DDPs to use their own interpretations to decide whether a change is a material change.

Due to this, the FPIs may decide to inform their respective DDPs of any minor or big change even of one that isn’t really a material change in a more cautious but safe manner.

Determining a particular change might occasionally be difficult due to the short deadlines. Additionally, it is still unclear whether notification should be provided seven working days after the change or seven working days after the change was brought to the FPI’s attention because these dates may fluctuate depending on the situation.

The seven working day time-period for updating the DDP and SEBI seems short. The FPIs and their compliance officers would have to be more on alert in order to meet the prescribed timelines, else the frequencies of non-compliances by FPIs may go up.

AMLEGALS REMARKS

FPI plays a significant role in boosting economy of a country and the current regulatory framework has helped in growth of FPIs in India.

The changes have been brought to reduce the complexity of earlier regime and to bring ease in compliance requirements of FPIs. However, there are still lacunas, which requires further practical inputs from active market participants to ensure a robust regulatory framework.

There are various challenges faced by FPIs in India ranging from complex taxing regime to unpredictable regulatory regime along with various geopolitical concerns, which has led to FPIs facing challenges in the Indian Markets.

However, the SEBI has been working actively to ensure that the regulatory mechanism is more conducive and friendly to the participants to increase the flow of FPI in Indian Markets.

– Team AMLEGALS, assisted by Ms. S. Maneesha (intern)

For any query or feedback, please feel free to get in touch with tanmay.banthia@amlegals.com or himanshi.patwa@amlegals.com