Funds with 'opaque' structures can't invest under new FPI rules

This new regime will kick in from next month

As Indian capital markets gear up for a streamlined structure for foreign investors, foreign funds with ‘opaque’ structures would not be allowed to come in under the new Foreign Portfolio Investor (FPI) regime.

This new regime would kick in from next month and provides for existing investor classes such as Foreign Institutional Investors (FIIs), their sub-accounts and Qualified Foreign Investors (FIIs) to become FPIs.

Besides, all new foreign investors wishing to invest in Indian markets would also need to register as FPIs, which have been divided into three categories on their risk profiles.

According to a detailed note prepared by the Securities and Exchange Board of India (Sebi) for this new regime, “opaque structures” will not be eligible to register as FPIs.

It has been noticed in the past that some foreign entities use complex multi-fund structures to invest in India.

There have been apprehensions about possible round-tripping or money laundering activities through such structures as a multi-class share vehicle (MCV) or protected cell companies (PCCs).

PCCs are specially designed entities that might comprise various cells, having funds of various investors, in such a manner that there is legal segregation and protection of assets and liabilities for each cell. According to Sebi, the FPIs would need to give a declaration that they were not operating as PCCs, MCVs or any such equivalent structures.

"However, an FPI applicant will not be considered as opaque structure and will be considered for grant of registration if it is required by its regulator or under any law to ring fence its assets and liabilities from other funds/sub funds," Sebi said.

Such applicants shall be eligible to be register as FPIs only upon meeting certain conditions. These include the applicant being regulated in its home jurisdiction and each fund or sub-fund satisfying broad-based eligibility criteria.

Besides, such applicants would also need to give an undertaking to provide information regarding its beneficial owners as and when Sebi seeks this information, Sebi said.

Under the new regime, select FPIs (excluding high-risk profile entities) would also be allowed to issue participatory notes.

P-Notes, or offshore derivative instruments, are mostly used by overseas HNIs, hedge funds and other foreign institutions to invest in Indian markets through registered FIIs, while saving on time and costs associated with direct registrations.