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SEBI (Foreign Portfolio Investors) Regulations, 2019

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 who propose to make portfolio investments in India.
  • Eligibility Criteria: To be eligible for registration as a Foreign Portfolio Investor (FPI), an applicant must satisfy certain conditions, including:
    • The applicant is not a resident Indian.
    • The applicant is not a non-resident Indian or an overseas citizen of India.
    • Non-resident Indians or overseas citizens of India or resident Indian individuals may be constituents of the applicant, subject to certain conditions.
  • Conditions for Constituents: The conditions for constituents of an FPI applicant include:
    • The contribution of a single non-resident Indian (NRI) or overseas citizen of India (OCI) or resident Indian (RI) individual should be below 25% of the total contribution in the corpus of the applicant.
    • The aggregate contribution of NRIs, OCIs, and RI individuals in the corpus of the applicant shall be below 50% of the total contribution in the corpus of the applicant.
    • The contribution of RI individuals should be made through the Liberalised Remittance Scheme notified by the Reserve Bank of India and should be in global funds whose Indian exposure is less than 50%.
    • The NRIs, OCIs, and RI individuals should not be in control of the applicant.
  • Categories of Foreign Portfolio Investors: FPIs can be categorized into:
    • 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.
  • Designated Depository Participant: A designated depository participant (DDP) is required to obtain approval from SEBI and must satisfy certain eligibility criteria, including:
    • The applicant should be a participant of a depository.
    • The applicant should have a minimum net worth of ₹50 lakhs.
    • The applicant should have adequate infrastructure and manpower to act as a DDP.
  • Application Process: The application for approval to act as a DDP should be made to SEBI through the depository in which the applicant has an agreement to act as a participant, accompanied by the application fee.
  • Fit and Proper Person: The applicant should be a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
  • Other Criteria: The applicant should satisfy any other criteria specified by SEBI from time to time.

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

  • Eligibility Criteria: To be eligible for registration as a designated depository participant, the applicant must meet certain 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
    • Being an Authorised Dealer Category-1 bank authorised by the Reserve Bank of India under the Foreign Exchange Management Act, 1999
    • Having a multinational presence, either through its branches or through agency relationships with overseas intermediaries regulated in their respective home jurisdictions
    • Having systems and procedures to comply with the requirements of the Financial Action Task Force Standards, PMLA, 2002, Rules prescribed thereunder and the circulars issued from time to time by the Board
    • Being a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008
  • Investment Conditions and Restrictions: Foreign portfolio investors are subject to certain investment restrictions, including:
    • Investing only in specified securities, such as shares, debentures, warrants, units of mutual funds, and derivatives traded on a recognised stock exchange
    • Complying with the requirements of the Financial Action Task Force Standards, PMLA, 2002, and the circulars issued from time to time by the Board
    • Holding, delivering, or causing to be delivered securities only in the dematerialized form
    • Complying with the terms, conditions, or directions specified or issued by SEBI or Reserve Bank of India from time to time
  • Registration and Surrender: The registration of a foreign portfolio investor is permanent unless suspended or cancelled by SEBI or surrendered by the foreign portfolio investor. The surrender of registration is subject to certain conditions, including:
    • The accounts held by the applicant in the capacity of FPI having nil balance and being blocked for further transactions
    • There being no dues or fees pending towards SEBI
    • There being no actions or proceedings pending against the said applicant
  • Suspension, Cancellation, or Surrender of Certificate: The certificate of registration granted to a foreign portfolio investor may be suspended, cancelled, or surrendered. The suspension and cancellation of the certificate of registration shall be dealt with in the manner provided in Chapter V of the SEBI Intermediaries Regulation, 2008. The surrender of the certificate of registration may be requested by the foreign portfolio investor, and the designated depository participant shall accept the surrender of the certificate of registration after obtaining approval from SEBI.

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

  • Conditions for Issuance of Offshore Derivative Instruments: SEBI has issued guidelines for the issuance of Offshore Derivative Instruments (ODIs) by Foreign Portfolio Investors (FPIs), which include:
    • FPIs are not allowed to issue ODIs referencing derivatives.
    • FPIs are not allowed to hedge their ODIs with derivative positions on stock exchanges in India, except in certain cases.
    • ODI issuing FPIs may hedge their ODIs with derivative positions in Indian stock exchanges, subject to certain position limits.
  • Code of Conduct for Foreign Portfolio Investors: FPIs and their key personnel must observe high standards of integrity, fairness, and professionalism in all dealings in the Indian securities market.
    • FPIs must render high standards of service, exercise due diligence, and independent professional judgment.
    • FPIs must ensure confidentiality in respect of trades done on their own behalf or on behalf of their clients.
    • FPIs must maintain an appropriate level of knowledge and competency and abide by the provisions of the Act, regulations, and circulars applicable to their activities.
  • Case Studies:
    • SEBI v/s HSBC (DDP and Custodian): HSBC was fined Rs. 5 lakhs for violating clause 5.1.4 of the Operational Guidelines of DDPs.
    • SEBI fined Stock Holding Corporation of India (SHCIL) as a DDP: SHCIL was fined Rs. 16 lakhs for non-compliance with rules and regulations, failing in its fiduciary duties.
  • Key Concepts:
    • Foreign Portfolio Investors (FPIs): FPIs are foreign investors who invest in Indian securities.
    • Offshore Derivative Instruments (ODIs): ODIs are derivative instruments issued by FPIs that reference Indian securities.
    • Designated Depository Participant (DDP): A DDP is an entity that is responsible for the registration and onboarding of FPIs.
    • Custodian: A custodian is an entity that holds and safeguards the securities of FPIs.
  • Review Questions:
    1. A foreign portfolio investor shall invest only in which of the following securities? (a) Domestic Mutual Fund Schemes (b) Derivatives traded on a recognised stock exchange (c) Units of Real Estate Investment Trusts (d) All of the above
    2. In respect of investments in the debt securities, the foreign portfolio investors need not comply with any conditions or directions given by Reserve Bank of India, as long as it is meeting the restrictions and conditions as specified by SEBI in its SEBI (FPI) Regulations. State whether True or False. (a) True (b) False
    3. The purchase of equity shares of each company by a single foreign portfolio investor including its investor group shall be below ___________ per cent of the total paid-up equity capital on a fully diluted basis of the company. (a) 10 (b) 15 (c) 20 (d) 24

SEBI (Foreign Portfolio Investors) Regulations, 2019 (Part 4)

  • Designated Depository Participant (DDP): A DDP may consider an FPI application that has been previously rejected by another DDP.
  • Key Consideration: The regulation allows for flexibility in the application process, enabling an FPI to reapply through a different DDP if their initial application is rejected.
  • Answer to the Statement: The statement is True, as a DDP is permitted to consider an FPI application that has been previously rejected by another DDP. The correct answer is: (a) True.
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