The Securities and Exchange Board of India (SEBI) has issued new operational guidelines for its new regulations that are intended to streamline procedures for foreign portfolio investors (FPI). Having come into effect from September 23, the biggest changes are the streamlining of FPI categories from three to two, and modifications to the know-your-client (KYC) process for FPIs.
FPIs are non-resident investors in Indian securities including shares, bonds, and convertible securities, with the investment not able to exceed 10 percent capital in any company. Previously, FPIs were classified into three categories, with category one being the highest tier which included insurance entities and funds from Financial Action Task Force (FATF) member countries.
Compliance rules were the easiest for category one and the strictest for category three. Now, several category two FPIs have been moved to category one, while all category three FPIs have been moved to category two, resulting in category three being eliminated.
Funds where the investment manager is from a FATF member country are also now category one, while funds with the investment manager from anon-FATF member country are in category two.
FPIs can be recategorized by the National Securities Depository Limited (NSDL) in consultation with the respective designated depositary participants (DDP). A category 2 FPI can seek to be re-categorized to category 1 by providing required information and applicable fees to the DPP.
The new regulations also provide clear guidelines on KYC requirements for FPIs.
There will now be up to nine types of documentation required for KYC of FPIs. Category one FPIs only have to provide seven, while category two FPIs have to provide all nine. FPIs will also need to provide a list of their beneficial owners (BO), who own or control the FPIs, with identification details such as date of birth, tax residency jurisdiction and tax residency number/social security number/passport or another government-issued identity document.
The regulations also cover investment of FPIs in various types of investment instruments including REITs and alternative investment funds (AIFs). FPIs can invest in category III AIFs with a stake of up to 25 percent, while investing in REITs and infrastructure investment trusts (InvITs) will be under the category “Hybrid Security” for the purpose of capturing FPI investment data.
FPIs can purchase non-convertible debentures (NCDs) and bonds under default, either fully or partly, in the repayment of principal on maturity or principal instalment in the case of an amortizing bond. All investment by FPIs in these bonds will be reckoned against the prevailing corporate debt limit.