SEBI (Foreign Portfolio Investors) Regulations, 2019

SEBI (Foreign Portfolio Investors) Regulations, 2019 (Part 1)

Definition: The SEBI (Foreign Portfolio Investors) Regulations, 2019, provide a framework for the registration and procedures of foreign investors making portfolio investments in India.
Eligibility Criteria: To be registered as a Foreign Portfolio Investor (FPI), an applicant must satisfy certain conditions, including:
- Not being a resident Indian
- Not being a non-resident Indian or an overseas citizen of India
- Meeting specific contribution limits for non-resident Indians, overseas citizens of India, and resident Indian individuals
- Being a resident of a country with a securities market regulator that is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding or has a bilateral MoU with SEBI
- Not being on the Sanctions List notified by the United Nations Security Council
- Being a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008
Categories of Foreign Portfolio Investors: FPIs can be registered in one of the following categories:
- Category-I: Government and government-related investors, pension funds, university funds, regulated entities, and entities from FATF member countries
- Category-II: Regulated funds not eligible as Category-I FPIs, endowments, foundations, charitable organizations, corporate bodies, family offices, individuals, and unregulated funds
Application to act as a Designated Depository Participant: An applicant must obtain approval from SEBI to act as a designated depository participant (DDP) and meet certain eligibility criteria, including:
- Being a registered depository participant under the SEBI (Depositories and Participants) Regulations, 1996
- Being a registered custodian under the SEBI (Custodian) Regulations, 1996
- Having a multinational presence and systems to comply with Financial Action Task Force Standards and PMLA, 2002
- Being a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008

SEBI (Foreign Portfolio Investors) Regulations, 2019 (Part 2)

Investment Conditions and Restrictions: Regulation 20 of the SEBI (Foreign Portfolio Investors) Regulations, 2019 specifies the investment restrictions for foreign portfolio investors.
Permitted Investments: A foreign portfolio investor can invest in the following securities:
- Shares, debentures, and warrants issued by a body corporate, listed or to be listed on a recognized stock exchange in India
- Units of schemes launched by mutual funds under Chapter V, VI-A, and VI-B of the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996
- Units of schemes floated by a Collective Investment Scheme in accordance with the Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999
- Derivatives traded on a recognized stock exchange
- Units of Real Estate Investment Trusts, Infrastructure Investment Trusts, and units of Category III Alternative Investment Funds registered with the Board
- Indian Depository Receipts
- Debt securities or other instruments permitted by the Reserve Bank of India for foreign portfolio investors to invest in
- Other instruments specified by the Board from time to time
Lock-in Period: If a foreign portfolio investor holds equity shares in a company whose shares are not listed on any recognized stock exchange and continues to hold such shares after the initial public offering and listing, the shares shall be subject to a lock-in period.
Secondary Market Transactions: Foreign portfolio investors can transact in the secondary market only on the basis of taking and giving delivery of securities purchased or sold.
Dematerialized Form: Foreign portfolio investors shall hold, deliver, or cause to be delivered securities only in the dematerialized form, except for shares held in physical form before the commencement of these regulations.
Registration: Securities shall be registered in the name of the foreign portfolio investor as a beneficial owner, unless otherwise approved by SEBI.
Investment Limits: The purchase of equity shares of each company by a single foreign portfolio investor, including its investor group, shall be below 10% of the total paid-up equity capital on a fully diluted basis of the company.
Suspension, Cancellation, or Surrender of Certificate: The registration granted by SEBI can be suspended, cancelled, or surrendered, subject to certain conditions and procedures.
Offshore Derivative Instruments: SEBI has issued guidelines for the issuance of Offshore Derivative Instruments (ODIs) by Foreign Portfolio Investors (FPIs), including restrictions on hedging ODIs with derivative positions on stock exchanges in India.

SEBI (Foreign Portfolio Investors) Regulations, 2019 (Part 3)

Investment Requirements: Investments through separate FPI registrations in the manner prescribed by SEBI.
Derivative Position: No fresh derivative position which are not in compliance with above requirements shall be allowed henceforth.
ODI Threshold: In determining whether a derivative instrument issued is an ODI or not, the threshold for trades with non-proprietary indices as underlying shall be taken as 20%.
Synthetic Short Activities: Synthetic short activities, where ODI are issued which has the effect of short sale in the Indian securities, continue to be prohibited for FPIs.
ODI Issuer: ODI issuer shall ensure that it has collected documents/ information enough to satisfy itself with regard to the relationship between the ODI subscriber and its Investment Manager from a FATF member country.

Code of Conduct for Foreign Portfolio Investor

Integrity and Fairness: A foreign portfolio investor and its key personnel shall observe high standards of integrity, fairness and professionalism in all dealings in the Indian securities market.
Service Standards: A foreign portfolio investor shall, at all times, render high standards of service, exercise due diligence and independent professional judgment.
Confidentiality: A foreign portfolio investor shall ensure and maintain confidentiality in respect of trades done on its own behalf or on behalf of its clients.
Segregation of Funds: A foreign portfolio investor shall ensure clear segregation of its own money and securities and that of its client's money and securities.
Knowledge and Competency: A foreign portfolio investor shall maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations made thereunder and the circulars and guidelines.

Case Studies

SEBI v/s HSBC: Penalty of 5 lakhs upon HSBC – DDP under Section 15A(b) of the SEBI Act for violation of clause 5.1.4 of Operational guidelines of DDP’s.
SEBI v/s Stock Holding Corporation of India (SHCIL): SEBI imposed a fine of Rs.16 lakh on Stock Holding Corp of India Ltd (SHCIL), a designated depository participant (DDP), for non-compliance with rules and regulations.

Review Questions

Investment Options: A foreign portfolio investor shall invest only in domestic mutual fund schemes, derivatives traded on a recognised stock exchange, and units of Real Estate Investment Trusts.
Compliance with RBI: The statement that foreign portfolio investors need not comply with any conditions or directions given by Reserve Bank of India is False.
Equity Share Purchase: The purchase of equity shares of each company by a single foreign portfolio investor including its investor group shall be below 10 per cent of the total paid-up equity capital on a fully diluted basis of the company.
DDP Application: A Designated Depository Participant (DDP) may consider an FPI application, which has been previously rejected by another DDP, is True.