Aditya specializes in asset management and funds within the firm’s corporate group. In addition to acting for institutional and first-time GPs, he also extensively advises significant LPs, as well as on fund restructuring, secondaries and governance matters. Aditya has been featured as one of the top ‘40 under 40’ Alternative Investment Professionals in India by the Association of Wealth Management of India and the Indian Association of Alternative Investment Funds (2019).
Foreign portfolio investment generally refers to purchase of listed equity, debt instruments and few other types of similar instruments, by non-residents, for which they must register with the Indian securities regulator, the Securities and Exchange Board of India (“SEBI”), as a foreign portfolio investor (“FPI”).
The SEBI (Foreign Portfolio Investors), Regulations, 2019 (“2019 Regulations”), notified in late September 2019 overhauled the earlier regime, in place since 2014 (“2014 Regulations”). These changes reflect recom-mendations made by a special committee constituted by SEBI to review the framework under the 2014 Regulations, as well as public consultations held by SEBI.
CATEGORIZATION OF FPIs
The 2014 Regulations bucketed FPIs into three categories, now reduced to two, with a view to rationalize the categorization and simplify the eligibility requirements (along with the process), as discussed below.
Category I
Appropriately regulated entities (insurance companies, banks, asset management companies etc.), governments (and instrumen-talities), pension funds and university funds are now eligible for a category I registration. Additionally, one of the underlying criterion for entities eligible for category I registration seems to be predicated on their domicile in a member country of the Financial Action Task Force (“FATF”).
University-related endowments from FATF member countries, where the university has been in existence for more than five years, are now eligible for category I registration. Also eligible for category I FPI registration are entities (i) whose investment manager is FATF member country domiciled and registered as a category I FPI, or (ii) that are 75% owned, directly or indirectly, by another entity domiciled in an FATF member country and satisfies the eligibility criteria for a category I FPI registration.
While a welcome change, the focus on FPIs (or their investment managers) being domiciled in FATF member countries has made a number of participants ineligible for a category I registration in their current form. For example, a number of funds (including regulated funds) in non-FATF member countries, notably Mauritius and Cayman Islands, must now consider whether a category II registration suffices their business objectives or consider restructuring options.
Category II
Category II serves as the residual category for FPIs, including regulated funds ineligible for category I registration. Notably, unregulated funds formed as limited partnerships or trusts are now bucketed into category II.
Erstwhile category III FPIs, under the 2014 Regulations, are expected to migrate to category II (unless eligible for category I, based on the new eligibility norms). Category III FPIs previously held to higher know your client (“KYC”) standards are now expected to experience some relief on account of the category upgrade. SEBI is, however, expected to issue operational guidelines (which have not been issued after a month of the 2019 Regulations being notified).
BROAD BASING
Certain types of category II FPIs that were funds were required to satisfy ‘broad based’ requirements under the 2014 Regulations, i.e. an FPI had to have at least 20 investors, with no single investor holding more than 49% of the FPI (generally, with a look-through to underlying funds being available). Under the 2019 Regulations, this requirement has been eliminated entirely, simplifying the eligibility and registration requirements.
ODIs
The 2019 Regulations have sought to enhance the coverage of what qualifies as an offshore derivate instrument (“ODI”), but have seemingly restricted access to ODIs by narrowing the scope of entities that can subscribe to ODIs.
Under the 2019 Regulations, only category I FPIs are eligible to issue ODIs. ODIs may only be subscribed to by persons eligible for a category I FPI registration (regardless of registration). A partial relaxation to this requirement has been provided in respect of an unregulated entity – so long as such entity has an FATF member country domiciled investment manager, the entity can subscribe to ODIs regardless of its investment manager’s registration as a category I FPI.
The 2019 Regulations have seemingly grandfathered existing ODIs by providing that existing ODIs are deemed issued under corre-sponding provisions of the 2019 Regulations; however, the market expects further clarity from SEBI under the impending operational guidelines.
OFF-MARKET TRANSACTIONS
The special committee had recommended that FPIs should be able to conduct an off-market transfer of unlisted, suspended or illiquid securities to domestic investors. SEBI, going a step further, extended such permission for transfers to other FPIs as well.
OPAQUE STRUCTURE
Entities with ‘opaque structures’ (i.e. as SEBI understood it, where the ultimate beneficial ownership (“UBO”) was unknown) were not permitted to register as FPIs. Given that FPIs must provide information on their UBO as part of the KYC requirements, SEBI has, under the 2019 Regulations, deleted the provisions that prohibited ‘opaque structures’.
The overhaul has seemingly received a positive feedback from market participants, however funds based in non-FATF member countries may have some work ahead of them. The operating guidelines are expected to iron out any implementation wrinkles faced by market participants in this transition.
