Mumbai: The Securities and Exchange Board of India (Sebi) on Wednesday unveiled a discussion paper proposing to ease the entry norms for foreign portfolio investors (FPIs).

The move is aimed at encouraging FPIs to invest directly in Indian markets without taking recourse to the so-called participatory notes (P-Notes).

P-Notes, or offshore derivative instruments (ODIs), are issued by registered FPIs to overseas investors who want to invest in Indian stock markets without registering themselves with the Securities and Exchange Board of India (Sebi). It is considered an opaque investment channel and a potential conduit for round-tripping of black money.

The rules the regulator has proposed to ease include expanding the eligible jurisdictions for registration of FPIs, rationalizing the “fit and proper" criteria for them and simplifying regulatory requirements.

Sebi has invited comments on the discussion paper until 27 July. The paper was issued after Sebi’s board on 21 June approved the proposals on easing registration norms for FPIs.

Mint had first reported on 8 September 2016 that the regulator was considering relaxing the rules for FPIs based on the recommendation of a Sebi working group.

“It is proposed that the list of eligible jurisdictions in terms of FPI regulations for grant of registration to Category I FPIs may be expanded by also considering those jurisdictions, wherein government of India has diplomatic tie-up and FEMA (Foreign Exchange Management Act)-compliant jurisdiction," Sebi said in the discussion paper. 

Currently, only those entities who come from a country that is part of the International Organization of Securities Commissions or the Bank for International Settlements are eligible for registration.

Category-I FPIs typically include foreign central banks, sovereign wealth funds and government agencies.

The proposed easing of norms may not go far enough to encourage direct investment by FPIs, said U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd. “...there are other issues that cause apprehensions for FPIs to invest directly, such as quantum of taxation, requirement to obtain a PAN (permanent account number), filing of returns etc. These compliance requirements (will) still keep P-Notes lucrative," Bhat said.

The regulator also proposed that Category I and II FPIs will not need to submit any additional documentation and meet procedural requirements. However, category III FPIs will continue to be subject to such requirements.

Category II FPIs include banks, asset management companies and investment managers. Category III FPIs are typically hedge funds—a class of investors that has onerous compliance requirements to meet.

Another big concern for FPIs has been around the “broad-based" criteria to qualify for inclusion in Category II. As per Sebi norms, a Category II fund should have at least 20 investors to qualify as broad-based; a pre-requisite for grant of a licence is that such overseas investors should have a bank as an underlying investor. 

Sebi has proposed that the broad-based criteria would be extended to funds that have other institutional investors such as sovereign wealth funds, insurance/reinsurance companies, pension funds and exchange-traded funds (ETFs) as their underlying investors.

In the event that some offshore global investors exit such a a fund, it may not result in the immediate loss of Category II status.

“It is felt that 3 months’ time may be given to such funds to regain broad base status," Sebi said in the discussion paper. 

The number of investors in open-ended funds used to fall below 20 in times of heavy redemption, said Suresh Swamy, partner, financial services, at consulting firm PricewaterhouseCoopers.

“They had the practical difficulty of meeting the broad based criteria in such situations. The consultation paper considers this difficulty and proposes to grant these investors a period of three months to get new investors, which is pragmatic," he added.

The regulator has also proposed that private banks/merchant banks could invest on behalf of their clients. They will be required to share details of beneficial owners when required by the markets regulator.

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