The Securities and Exchange Board of India (Sebi) will take up the matter of approvals from foreign regulators for selling Indian equities through the Qualified Foreign Investors (QFIs) framework with an international forum of financial sector regulators.
“This issue has come up recently. We are a member of IOSCO (International Organisa-tion of Securities Commis-sions). We will raise the issue there,” said Rajeev Kumar Agarwal, whole-time member, Sebi on the sidelines of a capital market seminar organised by Assocham.
Foreign institutional investors (FIIs), by definition, are ‘institutions’ which pool money in their home country for investment into India. FIIs need to be registered in their home country and in India, with Sebi. Before the introduction of the QFI regime, individuals and non-institutions were not allowed to invest directly in India.
|YES FOR FIIS; NO FOR QFIS?
- QFI targeted at individuals, associations
- FIIs are institutional investors, usually professionals
- QFIs don’t require Sebi registration
- QFIs not recognised yet by global regulators
- FIIs registered both in home country and with Sebi
- Global regulators cautious on approving retail-focused products
But under the QFI regime, individuals, associations or other such groups that are not necessarily professionals are allowed to invest. Unlike FIIs, QFIs are unlikely to be experts on Indian markets. Therefore, at least in the initial period, the QFI idea needs to be marketed to potential investors.
But, several regulators including the Securities Exchange Commission (SEC) of the US have rules that bar unapproved financial instruments from being sold in their countries. SEC, for example, also bars unregistered entities from marketing financial products.
While the QFI route is not recognised by foreign regulators, many of the 30 qualified depository participants (QDPs) who have approvals to administer the QFI regime also do not have foreign registrations.
These twin troubles have come as a spoke in the wheel for the newest investment route put together and marketed aggressively by the finance ministry, Sebi and the Reserve Bank of India since the beginning of the year.
Agarwal of Sebi added that the regulator can also solve the issue through bilateral discussions with particular regulators “if required”.
Industry is still trying to understand the issue. “Just a legal opinion costs a few lakhs. The US seems to have different registration requirements for banks, depositories and custodians. We are still trying to figure out which way to take,” said an official with a QDP.
SEC has stringent norms for approval of overseas products in general and is more cautious while approving products for retail investors. “Even the American Depository Receipts of several Indian companies trading there are not sold to retail individuals directly. Only institutions are allowed to buy in ADR issues.”
Even for QDPs with presence through group entities in the US, it will be difficult unless the product — (QFI) — itself gets a formal SEC approval.
Industry bodies are also taking up the matter. Naresh Maheshwari of the Association of National Exchanges Members of India, says such issues are likely to crop up and that Sebi and the government should work out passporting arrangements. “Intermediaries registered with one regulator should be allowed to operate in different countries,” he said.