Easier entry, faster registration for foreign institutions

Sebi accepts Chandrasekhar panel proposals, including easier KYC norms for entities backed by govts and doing away with need for registration with regulator

Foreign institutional investors (FIIs) will now be able to enter Indian markets faster and register themselves more quickly with the regulator accepting the recommendations of the Chandrasekhar committee report.

While the time required for registration is supposed to be a week or less, the need for documentation can push it to over six months, according to those in the know. The new norms are expected to significantly reduce the time required to do so. The Securities and Exchange Board of India (Sebi) has given its nod to the suggestions of the committee, which include lower Know Your Client (KYC) requirements for entities backed by governments and doing away with the need for registration with the regulator, according to a press release following a board meeting today.

Sebi has said FIIs, sub-accounts and qualified foreign investors (QFIs) are to be merged into a new investor class to be termed “foreign portfolio investors” (FPIs). Neither FIIs nor their sub-accounts will require prior registration with the regulator. Instead, they would register themselves directly with designated depository participants (DDPs).

The regulator has also adopted a risk-based approach to KYC, dividing it into three categories on the basis of perceived risk. The first will cover organisations backed by the government, such as sovereign wealth fund. The second will cover regulated entities such as foreign mutual funds, while all other entities would fall in the third category.

Also, it has clearly defined foreign direct investment as any investment exceeds 10 per cent stake in the company.

Richie Sancheti, senior associate at Nishith Desai Associates, indicated the move would do much towards rationalisation of foreign inflows.

"The move to harmonise and streamline the KYC norms will ease the process of entry of foreign portfolio investors into India. Sovereign wealth funds and institutional investors can invest more easily on a disintermediated basis. While the complete committee report is awaited, the earlier press release did clarify that other investors that  get categorised under category III portfolio investors on the basis of risk weightage, may not be permitted to issue participatory notes,” he said.  

Yogesh Chande, consultant, Economic Laws Practice, suggested entities already registered might have some leeway.  “It will be good to see how existing FII and FII sub-accounts would glide into the new regime. My sense is, perhaps they will be automatically grandfathered. The risk based-approach to KYC is a welcome move,” he said.

Other recommendations would likely require a move from the government, according to the Sebi statement.

The committee had also suggested the category III entities should not be allowed to issue participatory notes. This did not find a mention in the press release following the Sebi board meet.
NEW ROAD

• FIIs, sub-accounts and QFIs merged into “foreign portfolio investors” route
• Foreign institutions to register with Designated Depository Participants instead of Sebi
• Risk-based approach to KYC
• All investments above 10 per cent stake in the company to be termed FDI