Foreign Portfolio Investors/Foreign Institutional Investors (FPIs/FIIs) are often referred to as fair-weather friend who invest only in good times, leave the country/company alone in bearish market. However, all said and done, no one can deny the money provided to India, Inc., by these FIIs and the importance of FIIs in the economy.
As far as India is concerned Foreign Portfolio Investors/Foreign Institutional Investors (FPIs/FIIs) have been one of the largest drivers of India’s financial markets, having invested ~Rs. 36478crore in 2021-22 (as of Dec 6, 2021).
On 7 January 2014, SEBI introduced SEBI (Foreign Portfolio Investors) Regulations 2014 (“FPI Regulations”). The purpose to introduce FPI regulations was to consolidate different classes of investor existing at that time at one place and provide for investment criteria, terms and conditions under one umbrella. Earlier existing regulations w.r.t investor class Foreign Institutional Investor (“FII”) and Qualified Foreign Investors (“QFI”) regime was subsumed into Foreign Portfolio Investors regime.
There were grandfathering provisions provided to FIIs and QFIs.
The SEBI (Foreign Portfolio Investors) Regulations 2014 is further replaced/substituted by SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations, 2019”) which was notified on 23rd Sept 2019.
Definition:
As per the FPI Regulations, 2019 “Foreign portfolio investor” means a person who satisfies the eligibility criteria and has been registered under Chapter II of SEBI (Foreign Portfolio Investors) Regulations 2019, which shall be deemed to be an intermediary in terms of the provisions of the Securities and Exchange Board of India Act, 1992.
Eligibility Criteria as provided in Chapter II of SEBI (Foreign Portfolio Investors) Regulations 2019 for Foreign Portfolio Investor is as follows:
Following conditions need to be satisfied for registration as a foreign portfolio investor:
(a) an applicant is a person not resident in India;
(b) the applicant is not a person non-resident Indian or an overseas citizen of India;
(c) non-resident Indians or overseas citizens of India or resident Indian individuals can be constituents of the applicant provided they meet conditions specified by the Board from time to time;
(d) the applicant is resident of a country whose securities market regulator is a signatory to International Organisation of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Board;
Provided that an applicant being Government or Government related investor shall be considered as eligible for registration if such applicant is a resident in the country as may be approved by the Government of India;
(e) the applicant being a bank, is a resident of a country whose central bank is a member of Bank for International Settlements;
Provided that a central bank applicant need not be a member of Bank for International Settlements;
(f) the applicant or its underlying investors contributing twenty-five percent or more in the corpus of the applicant or identified on the basis of control, shall not be the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and is not a resident in the country identified in the public statement of Financial Action Task Force as –
(i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
(ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies;
(g) the applicant is a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
(h) any other criteria specified by the Board from time to time:
Provided that clause (a), (d) and (e) shall not apply to an applicant incorporated or established in an International Financial Services Centre.
For the above:
(i) The term “person” shall have the same meaning as assigned to it under s 2 (31) of the Income-tax Act, 1961;
(ii) The term “non-resident” shall have the same meaning as assigned to it under the Income-tax Act, 1961;
(iii) The term “resident in India” shall have the same meaning as assigned to it under the Income-tax Act, 1961;
(iv) “Bilateral Memorandum of Understanding with the Board” shall mean a bilateral Memorandum of Understanding between the Board and the overseas regulator that, inter alia, provides for information sharing arrangements under cl (ib) of sub-s (2) of s 11 of the Securities and Exchange of India Act, 1992.
Categories of registration
The FPI Regulations have streamlined the categorization of FPIs by clubbing the erstwhile three categories into two. The concept of broad-based criteria have also been removed, the categorization of an FPI is dependent upon whether such FPI or its investment manager is based in an FATF compliant jurisdiction.
Now, A foreign investor seeking to take registration as FPI as register in one of the two categories viz:
(a) “Category-I foreign portfolio investor” includes:
(i) Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government and Government related investor(s);
(ii) Pension funds and university funds;
(iii) Appropriately regulated entities1 such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker dealers and swap dealers;
(iv) Entities from the Financial Action Task Force member countries which are –
- appropriately regulated funds;
- unregulated funds whose investment manager is appropriately regulated and registered as a Category I foreign portfolio investor:
Provided that the investment manager undertakes the responsibility of all the acts of commission or omission of such unregulated fund;
III. university related endowments of such universities that have been in
existence for more than five years;
(v) An entity (A) whose investment manager is from the Financial Action Task Force member country and such an investment manager is registered as a Category I foreign portfolio investor; or (B) which is at least seventy-five per cent owned, directly or indirectly by another entity, eligible under sub-clause (ii), (iii) and (iv) of clause (a) of this regulation and such an eligible entity is from a Financial Action Task Force member country:
Provided that such an investment manager or eligible entity undertakes the responsibility of all the acts of commission or omission of the applicants seeking registration under this sub-clause.
(b) “Category-II foreign portfolio investor” includes:
all the investors not eligible under Category I foreign portfolio investors such as; (i) appropriately regulated funds not eligible as Category-I foreign portfolio investor;
(ii) endowments and foundations;
(iii) charitable organisations;
(iv) corporate bodies;
(v) family offices;
(vi) Individuals;
(vii) appropriately regulated entities investing on behalf of their client, as per conditions specified by the Board from time to time;
(viii) Unregulated funds in the form of limited partnership and trusts;
As per the explanation to regulation an applicant incorporated or established in an International Financial Services Centre shall be deemed to be appropriately regulated.[1]
Designated Depository Participant
One of the salient factor of the FPI regulations, 2019 as notified by SEBI is that registration of applicant is been delegated to Designated Depository Participant (DDP) by SEBI. A person can act as DDP only after taking approval from SEBI. SEBI shall grant an approval to a person to act as DDP subject to satisfaction of inter alia the following conditions:
- a) The applicant is a participant and custodian registered with the SEBI;
- b) The applicant is an Authorised Dealer Category-I bank authorised by the Reserve Bank of India;
- c) The applicant has multinational presence either through its branches or through agency relationships with intermediaries regulated in their respective home jurisdictions;
- d) The applicant has systems and procedures to comply with the requirements of FATF Standards, Prevention of Money Laundering Act, 2002, and the rules and circulars prescribed thereunder.
Foreign Venture Capital Investors and REITS and INVITS
Venture capital is a seed funding in which the investment is made at the initial growing stage of a venture. It is a funding into ideas and innovation having the potential for high growth with inherent uncertainties. The relevance of and need for Foreign Venture Capital Investor as a class of investor can be appreciated from report of K.B. Chandrasekhar Committee on Venture Capital.
Extract from the report of K.B. Chandrasekhar Committee on Venture Capital is reproduced below:
“With a view to promote innovation, enterprise and conversion of scientific technology and knowledge based ideas into commercial production, it is very important to promote venture capital activity in India. India’s recent success story in the area of information technology has shown that there is a tremendous potential for growth of knowledge based industries. This potential is not only confined to information technology but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. Given the inherent strength by way of its skilled and cost competitive manpower, technology, research and entrepreneurship, with proper environment and policy support, India can achieve rapid economic growth and competitive global strength in a sustainable manner.
A flourishing venture capital industry in India will fill the gap between the capital requirements of technology and knowledge based startup enterprises and funding available from traditional institutional lenders such as banks. The gap exists because such startups are necessarily based on intangible assets such as human capital and on a technology-enabled mission, often with the hope of changing the world. Very often, they use technology developed in university and government research laboratories that would otherwise not be converted to commercial use. However, from the viewpoint of a traditional banker, they have neither physical assets nor a low-risk business plan. Not surprisingly, companies such as Apple, Exodus, Hotmail and Yahoo, to mention a few of the many successful multinational venture-capital funded companies, initially failed to get capital as startups when they approached traditional lenders. However, they were able to obtain finance from independently managed venture capital funds that focus on equity or equity-linked investments in privately held, high-growth companies. Along with this finance came smart advice, hand-on management support and other skills that helped the entrepreneurial vision to be converted to marketable products.”
[1] An applicant seeking registration as a foreign portfolio investor shall be considered to be “appropriately regulated” if it is regulated or supervised by the securities market regulator or the banking regulator of the concerned foreign jurisdiction, in the same capacity in which it proposes to make investments in India.
Our services
- Advisory of various structures available
- Registration of Investment Vehicle
- Strategy making
- Compliance of reporting requirement
- Documentation Advisory in relation to Investment outside India
- Development of Exit Strategy, Regulatory compliance pertaining to quarterly reporting by FVCI
- Registration and reporting by FPIs
- Structuring of Investment
Reach Out to Us