Sinha panel wants single class for foreign investment

A committee set up to review the policies for foreign investments in India has recommended a major overhaul of the regulatory framework. It proposes a structure where foreign entities could start investing in the domestic market without setting foot on Indian soil.

The panel also proposes doing away with different categories like foreign institutional investors (FIIs), foreign venture capital investors (FVCIs) and non-resident Indians (NRIs).

The proposals are part of the recommendations by The Working Group on Foreign Investment headed by UTI Mutual Fund chairman U K Sinha, comprising members of the ministry of finance and the Securities and Exchange Board of India (Sebi).

“The working group recommends a single window for registration and administration of portfolio investment regulations, what we call Qualified Foreign Investors (QFI),” said the 133-page report. “The QFI framework would cut across asset classes with no distinction made between investor classes. FIIs, FVCIs and NRIs would be abolished as an investor class.”

The report recommends replacing the Sebi FVCI and FII regulations with a new QFI regulation.

The committee is in favour of allowing qualified depository participants (DPs) to set up offshore branches through which QFIs would be registered. However, in order to remove any element of laxity in the Know Your Client (KYC) norms, such DPs would require to pass a detailed Sebi “fitness test” and have higher capital requirements. The FEMA (Transfer or Issue of Any Foreign Security) Regulations will also require changes to allow setting up of DPs abroad, said the report.

The DPs would also be legally responsible for enforcing OECD (Organisation for Economic Co-operation and Development) standard KYC requirements.

Meanwhile, the Sebi (Stock Broker and Sub-Broker) Regulations will also have to be amended to allow stock brokers to register foreign investors as clients with the regulator.

According to the committee recommendations, DPs will have to report the KYC information on behalf of clients investing in unlisted equity directly to the Reserve Bank of India (RBI). The central bank will also have to give approval for the opening of limited purpose accounts for securities transactions.