Sebi proposes to ease foreign investors' compliance burden

The Securities and Exchange Board of India (Sebi) has proposed to ease the compliance burden on foreign portfolio investors (FPI) by reducing documentation and doing away with approvals for merger of schemes.

In a consultation paper it has issued, the markets watchdog has proposed to exempt FPIs which have multiple investment managers from taking Sebi approval for free of cost (FOC) transfers. Designated depository participants (DPPs) would clear such applications. Foreign funds will also not need approval from Sebi to change their DPPs, which act as brokers and first-level regulators for FPIs.

Further, Sebi proposes to also do away with a majority of the conditions prescribed under the 'fit and proper' criteria for category-I and II investors. It says that as these are well-regulated in their home jurisdiction, there is no need for additional paperwork. "Category I and II FPIs are essentially government and regulated entities," explains the discussion paper.

In the paper, Sebi has also met a long-standing demand of category-II FPIs by tweaking the definition of 'broad based funds', doing away with the requirement to meet a minimum number of investors' criterion. In the current regulations, an FPI needs at least 20 investors, with none holding more than 49 per cent, to be called a broad based fund. However, as a majority of such funds are open-ended, the number of investors could fall below the prescribed 20 thresholds at any time, losing the label. Sebi now proposes that in such cases, a fund may continue to remain 'broad based', as long as its underlying investors are banks, sovereign funds or other institutional investors.

KEY PROPOSALS

Expansion of eligible jurisdictions: Eased criteria to enable more jurisdictions such as other provinces in Canada, to access the domestic market

Rationalisation of fit & proper criteria: Less documentation for category I and II FPIs

Easing of encumbrance obligation: Definition of encumbrance eased; transactions like irrevocable payment commitment kept out

Broad-based definition eased: Minimum investors requirement eased for funds backed by sovereign wealth fund, insurance and pension funds eased

Reduced compliance: Sebi approval done away with while changing depository participant, merger of schemes

Leeway in investments: Permitting banks to invest on behalf of clients

In the paper, Sebi has also proposed to relax the rules for a fund to be registered as a category-I FPI. Until now, only those from countries which are a signatory to the International Organisation of Securities Commission's (IOSCO's) Multilateral Memorandum of Understanding (MMoU) are eligible. The proposal is that even funds from countries which have diplomatic ties with India and are compliant with our Foreign Exchange Management Act can be category-I FPIs.

"Category-I entities are essentially government and related entities or multilateral agencies and are perceived to be the highest quality and lowest risk investors, with a long-term investment horizon generally. Therefore, for multilateral agencies, there may not be any requirement to pass a jurisdiction check," Sebi suggests.

This amendment has been made keeping in mind countries, such as Canada, where there is no nationwide markets regulator but have provincial regulators instead.