Regulatory Watch . Some hits and misses for FPIs

In June 2017, SEBI had issued a ‘consultation paper’ on the regulatory framework governing foreign portfolio investors (FPI), with the objective of simplifying the registration process and compliance norms for them.

The proposals thereunder were approved by SEBI in its board meeting subsequently in December, and some of them were brought into effect by a ‘circular’ issued earlier this month.

For easing the registration processes, the circular introduces certain relaxations. These include: (a) no prior approval of the custodians for introducing new share classes which track the same underlying investments; (b) simplification of the renewal process by cutting down the paperwork for information previously submitted, provided there has been no change; and (c) extending the facility of conditional registration to existing funds proposing to convert to India-dedicated funds.

Improving quality of service

Further, global custodians, who represent its FPI clients and liaise with local custodians for services in India, are now permitted to change the local custodian on behalf of such FPI clients. Additionally, the new local custodian may rely on the due diligence undertaken by the former custodian.

Thus, these amendments are likely to improve the quality and competitiveness of custody services in Indian markets.

Other amendments include specific relaxations for FPIs operating under multi-investment manager (MIM) structures.

An MIM structure is typically an umbrella entity hosting several sub-funds, with each sub-fund having an independent investment manager. Such platforms are generally utilised by large global institutional investors, such as pension funds, university funds, large endowments to channelise their investments through different investment managers.

The circular now permits MIM structures, operating under one entity, to obtain separate FPI registrations and appoint separate local custodians for each sub-fund. Another crucial amendment is that a request for ‘free of cost’ transfer of assets among FPIs operating under an MIM structure (and having the same PAN), will now be processed by the custodian itself, as opposed to SEBI.

The circular has neglected most of the substantive changes that were proposed in the consultation paper. These include proposals relaxing the FPI eligibility conditions. However, the circular permits private banks/merchant banks, classified as Category II FPIs, to invest on behalf of their clients, based on certain conditions.

Such structures, typically referred to as ‘ omnibus accounts ’, were frowned upon by SEBI, since the end-investors were difficult to identify as the entity directly investing would be a private bank.

Opening the floodgates

The circular now permits high networth individuals and family trusts, who were previously required to register as Category III FPIs, to invest in India through global banks. This amendment could open the floodgates for a significant amount of private capital to enter India, since omnibus accounts are most commonly used by wealth management arms of private banks to channelise their client funds.

The writers are Associate Partner and Associate respectively, Khaitan & Co.

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