Mumbai: The markets regulator on Wednesday eased the regulatory and compliance framework for foreign portfolio investors (FPI) by broad-basing their classification, and simplifying their registration, entry and know-your-customer (KYC) norms in a bid to boost investments.

In another key move, the Securities and Exchange Board of India (Sebi) relaxed the buyback norms for listed firms that own non-banking financial companies (NBFCs) and housing finance companies (HFCs) subsidiaries. This move will free conglomerates from the restrictive debt-to-equity ratio (DER) norms calculated on a consolidated basis for guiding buybacks.

The new FPI norms are the outcome of the regulator’s board meeting on Wednesday, which collapsed 57 circulars and 183 FAQs regarding FPIs into

a single circular. There are now expectations that the Union finance ministry will provide a special carve-out for FPIs from the higher tax surcharge announced during the 2019-20 budget.

FPIs have been withdrawing from Indian equities after the finance minister introduced higher tax surcharge on the super-rich in the budget in July. In the past two months, FPIs have sold Indian shares worth $3.07 billion, while they were net buyers of shares worth $11.3 billion till June.

However, analysts say India’s macro headwinds could still discourage FPIs from buying Indian shares. Year to date, the MSCI World Index has risen 12.5% and the MSCI Emerging Markets Index 1.48%, while India’s benchmark Nifty shed 1.99% in dollar terms.

Till now, Sebi classified FPIs into three categories, with the easiest set of compliance norms for Category-I FPIs and the strictest for Category-III FPIs. The classification of an FPI depends on the way the offshore entity is regulated in its home market or the number of investors in the fund. The most well-regulated FPIs fall into Category-I. On Wednesday, Sebi removed the concept of Category-III FPIs. There will now be only two categories of FPIs, said Sebi. However, Sebi has not elaborated how the two categories of FPIs will be decided.

The new norms will usher in a more simplified and rational regime, said Siddharth Shah, partner at law firm Khaitan and Co. “For FPIs, the biggest pain point was that a large part of the registration process and KYC was spent on proving that they are broad-based. Those will go away now."

FPIs will now also be allowed to buy or sell shares off-market to any domestic or foreign investor even if the stock of such a company is unlisted, suspended or illiquid. The norms for issuance and subscription of contentious offshore derivative instruments such as participatory notes or P-notes have also been rationalized, said Sebi. In 2017, Sebi had restrained FPIs from issuing P-notes unless they were meant for hedging market investment risks.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Further, Sebi has also permitted offshore funds floated by Indian asset management companies to register themselves as FPIs and invest in Indian markets.

The relaxation in FPI norms is mostly in line with the recommendations of the H.R. Khan committee report submitted to Sebi in May.

“This is a much-needed boost to the FPI route, which had been languishing on account of multiple issues in the past few months. Relaxing the broad-based criteria will open up the FPI route to a whole new category of entities, who were unable to meet the 20-investor test," said Shruti Rajan, partner at law firm Cyril Amarchand Mangaldas.

The relaxation in the buyback norms assumes significance in the wake of an increasing number of NBFCs and HFCs witnessing accumulation of debt and consequent deterioration in their DER. At present, to conduct a buyback of shares a listed firm has to ensure that the post-buyback DER is not over 2:1, both on a stand-alone and consolidated basis.

After Wednesday’s board meeting, Sebi said that if a company has NBFC and HFC subsidiaries, the holding firm can pursue a share buyback only if the stand-alone company’s DER is 2:1 post buyback; the consolidated group’s DER would also have to be 2:1 after excluding the NBFC and HFC subsidiaries, provided DER of these subsidiaries doesn’t exceed 6:1.

Sebi also tightened regulations for credit rating agencies. It said that for rating firms to have timely information on the default of an entity, the issuer (whose loan instrument is being rated) and the rating agency need to enter into an agreement in which the issuer will provide explicit consent to the rating agency to obtain details of the issuer’s existing or future borrowings; its repayment or delay or default in servicing the debt either from the lender or any other statutory organization.

“Rating agencies are often blamed, but they should get information about the loans, defaults in time. We are trying to address this issue through this amendment," Sebi chairman Ajay Tyagi said after the board meeting.

On the government’s plan to raise the minimum public shareholding for listed firms from 25% to 35%, Tyagi said: “Our view is that liquidity is good but there are some aspects, which need to be further examined as to what is the right level to mandate it. If on its own it (public shareholding) goes to a higher level, that is always welcome."

Tyagi said that according to a study, public shareholding on an average is already around 50% in several listed companies.

He, however, said that around 45% of the listed PSUs are still not compliant with the minimum public shareholding norms (i.e. 25% holding by public shareholders). State-run firms have a deadline till August 2020 to comply with the norms.

The Sebi board has also allowed mutual funds to now invest in unlisted non-convertible debentures. Any MF can now invest up to 10% of the debt portfolio of the scheme in unlisted NCDs as long as they are rated, secured and carry monthly coupons, said Sebi. This will be implemented in a phased manner by June 2020.

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