Sebi comes out with risk management norms for FPIs

Market regulator Sebi today came out with a risk management framework for Foreign Portfolio Investors (FPIs) pertaining to various aspects, including margin requirements.
The FPI regime which will kick in from next month, brings together all foreign investor classes such as Foreign Institutional Investors (FIIs), their sub-accounts and Qualified Foreign Investors (QFIs).
FPIs have been divided into three categories as per their risk profiles.
All trades undertaken by FPIs in the cash market would be margined on a T+1 basis --settlement of trades with all the required payments one day after the execution of the trade order.
"The trades of FPIs in Category I, II and III shall be margined on a T+1 basis," the Securities and Exchange Board of India said in a circular.

However, the trades of FPIs who are corporate bodies, individuals or family offices would be margined on an upfront basis as per the extant margining framework for the non-institutional trades.

With regard to equity derivatives segment and Interest Rate Futures, Sebi said Category I and II FPIs would have position limits "as presently available to FIIs."
"Category III FPIs shall have position limits as applicable to the clients," Sebi noted.
The new FPI regime would come into force from June 1.
Sebi said that entities who trade on behalf of FPIs would inform the stock brokers of the details of FPIs on whose behalf the trades would be undertaken. The stock broker, in turn, would inform the bourses the details of such related FPIs.

The regulator said that stock exchanges would put-in place suitable mechanism to ensure that allocation of trade by a FPI is permitted only within such related FPIs.
Sebi said custodians/designated depository participants (DDPs) would provide necessary details related to FPIs, including categorisation of such entities to the stock exchanges for implementing these guidelines.
The new regime divides FPIs into three categories as per their risk profile and the KYC (know your client) requirements and other registration procedures would be simpler.
Category-I FPIs (lowest risk category) would include foreign governments and government-related foreign investors.
Category-II FPIs include appropriately regulated entities, broad-based funds whose investment manager is appropriately regulated, university funds, university-related endowments and pension funds.

Category-III FPIs would include all others not eligible under the first two categories.