SEBI suggests combined stock limit for FIIs, sub-accounts and QFIs

A committee set up by the Securities and Exchange Board of India (SEBI) has recommended rationalisation of the portfolio investment route for foreign investors by merger of the existing FIIs, sub-accounts and qualified foreign investors (QFI) into a new investor class to be termed `Foreign Portfolio Investor' (FPI).

The committee headed by former cabinet secretary K M Chandrasekhar and comprising representatives of the government, Reserve Bank of India and various market participants, suggested that the aggregate investment limit for the FPI should be kept at 24 per cent (being the present default aggregate limit for FIIs, which can be raised by the company up to the sectoral cap).

However, in view of the special nature of the investments from non-resident Indians (NRIs) and foreign venture capital investors (FVCIs), the committee recommended continuation of these two classes for the present.

Consequently, NRIs will continue to have individual investment limit of 5 per cent and aggregate investment limit of 10 per cent.

The committee felt that the present list of nine sectors should be considerably expanded for investment by foreign venture capital investors. Alternately, it suggested that the government create a negative list so that rest of the sectors is opened for VCF activity.

In a significant move to make the procedure much simpler, the committee recommended that prior direct registration of FIIs and sub accounts with SEBI should be done away with. Instead, FPIs would be able to register themselves with and transact through designated depository participants (DDPs). The qualification of DDPs would be as prescribed by SEBI.

It suggested that portfolio investments should be defined as investment by any single investor or investor group, which should not exceed 10 per cent of the equity of an Indian company. Any investment beyond the threshold of 10 per cent should be considered as foreign direct investment (FDI). 

The committee has also dealt with migration of FPI into FDI and situations where FDI investments fall below 10 per cent.

From the point of KYC, the committee recommended categorisation of FPIs into three categories:

• Category I (Low Risk) – which would include government and government related entities such as foreign central banks, sovereign wealth funds, multilateral organisations etc.
• Category II (Moderate Risk) – which would include regulated entities such as banks, asset management companies, broad-based funds such as mutual funds, investment trusts, insurance and reinsurance companies, university funds, pension funds and university related endowments already registered with SEBI.
• Category III (High Risk) – All other FPIs not eligible to be included in the above two categories.

The approach to KYC will be risk-based.

The documents needed for registration and onboarding would be the simplest for Category I and the most stringent for Category III.

The committee recommended that the requirement of submitting personal identification documents such as copy of passport, photograph etc of the designated officials of FPIs belonging to Category I and Category II should be done away with. SEBI would separately prescribe the documentation needed for the three categories.

With regard to issuance of offshore derivative instruments (ODI) / participatory notes (PN), the committee recommended that FPIs belonging to Category III should not be allowed to issue ODI/PN.

Further, the ODI/PN issuer FPIs will continue to report directly to SEBI, as prescribed by SEBI.

The committee also identified the changes required to be effected in different statutes to bring about the proposed recommendations into effect. 

With the simplification of procedures in KYC/account opening and onboarding etc, the committee believes it will make the experience for FPI of entering into India more pleasurable and smooth, resulting in increasing inflows into India.