One route good, three routes better?

The K M Chandrasekar committee, which has submitted its recommendations on foreign investment, has invented a few new acronyms. Going by the release put on the Securities and Exchange Board of India (Sebi) website, new abbreviations such as foreign portfolio investor (FPI) and designated depository participant (DDP) and changes and tweaks therein will be hogging pink paper headlines soon.

While the original objective of this committee and its earlier version was to harmonise the investment routes and move towards fewer routes with lesser complications, somewhere things seem to have gone wrong, as actual consolidation of the investment routes continues to be elusive.

Many of the existing acronyms remain, while others reappear in new forms, reducing a great opportunity to an exercise in semantics. The committee itself has said foreign venture capital investors (FVCIs) and non-resident Indians (NRIs) will continue to remain separate categories. People in the know say Reserve Bank of India had severe reservations about touching these routes, as these might affect the legal framework governing foreign exchange. So, foreign direct investment (FDI) remains FDI.

That leaves us with changes in essentially two routes: foreign institutional investors (FIIs) and qualified foreign investors (QFIs). If one considers sub-accounts a separate route, we have three. The committee proposes to merge FII, QFI and sub accounts into FPI.

But, how many routes does the proposed new regime have? Er… Three. How? That's because FPI itself will have three categories.

Category I is for the good boys: Government and government-related entities such as foreign central banks, sovereign wealth funds, multilateral organisations, etc. Since these are of great pedigree, the committee brackets these in the low-risk category and will benefit from least compliance hurdles.

Asset managers, banks, broad-based funds and pension funds are considered to be of moderate risk and have slightly higher KYC requirements.

The bad boys fall in Category III and are proposed to be slapped with the tightest compliance norms. These entities will also be barred from issuing P-notes and such offshore derivate instruments.

The differential KYC idea, at the outset, seems to be risky and goes by the assumption that some entities are inherently benign and are less risky than others. The experience during the 2008 financial crisis was definitely different.

A voluminous report, which is said to have been submitted to the powers that be, hopefully contains more details that justify the benefits of such renaming and risk weights.

The release also says while the requirement for prior registration with Sebi will be done away with, for FPIs the onus is put on DDPs. This is similar to the requirements for the QFI route, which has the qualified depository participants (QDPs).

A significant number of man hours in Sebi was spent in framing the rules for QDPs, ironing out issues and approvals of QDPs pushed by the earlier dispensation in the North Block. The QDPs themselves would have spent a lot of time and energy in complying with these requirements. Now, it is not clear if all these registered QDPs will qualify automatically to operate as DDPs. If fresh criteria are put forward, which seems to be the suggestion, a number of these entities will fall by the wayside.

The committee believes the measures would make investing in India "more pleasuresome and smooth, resulting in increasing inflows into India." Smooth, one can understand; Pleasuresome? Creating more acronyms and prescribing more discrimination among investors are certainly not going to please one and all.