The Securities and Exchange Board of India (SEBI) has relaxed the regulatory and compliance framework for foreign portfolio investors (FPIs).
FPI regulations have been redrafted based on the recommendation of a committee headed by former RBI deputy governor H R Khan.
What is FPI?
Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country.
It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.
Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy.
In a developing economy, foreign portfolio investors (FPIs) are perceived to be more uncertain than domestic institutional investors.
Thus, foreign investment flows tend to be less stable as these are influenced by global liquidity drivers.
What are the key changes?
The changes come as part of efforts to simplify and expedite the registration process for foreign portfolio investors (FPIs).
SEBI simplified the documentation requirements for KYC, for foreign portfolio investors.
It also permitted them to carry out off-market transfer of securities.
The changes did away with the broad-based eligibility criteria for institutional FPIs.
Under the new framework, FPIs would be classified into two categories instead of three.
The requirements for issuance and subscription of offshore derivative instruments (ODIs) have also been rationalised.
Mutual funds with offshore funds too can invest in India after registration as FPIs to avail certain tax benefits now.
Central banks that are not members of the Bank of International Settlements are also allowed to register as FPIs and invest in the country under the new norms.
This is to attract more overseas funds into the market.
SEBI has allowed entities registered at an international financial services centre (IFSC) to be automatically classified as FPIs.
This might help foreign investors bypass some of the restrictions.
FPIs shall be permitted for off-market transfer of securities, which are unlisted, suspended or illiquid, to a domestic or foreign investor.
Besides, registration for multiple investment manager (MIM) structures has been simplified.
What is the possible rationale?
SEBI’s move could have possibly been motivated by the recent flow of funds out of India’s capital markets.
Capital in excess of Rs. 20,000 crore has left Indian shores in the recent period.
This was an after effect of the decision in Union budget 2019 to increase taxes on FPIs.
Policymakers were clearly under pressure to do something to allay the fears of foreign investors.
The SEBI’s move is much in line with addressing this.
What is the significance?
The easing of regulatory restrictions are likely to make life easier for foreign portfolio investors (FPIs).
Smart cities, along with other urban development agencies, will now be allowed to issue municipal bonds to raise funds for development.
These measures to cut red tape will help lower the regulatory burden on investors.
It will also help globalise India’s financial markets, and aid the growth of the broader economy by increasing access to growth capital.
What are the shortfalls?
There remains a broader trend of capital flowing out of emerging markets across the world.
Given this, it remains to be seen whether SEBI’s present move will yield immediate benefits.
Even if it fails to do so, the move will still help Indian markets become more attractive to foreign investors in the long-run.
