Sebi proposes relaxed entry norms for FPIs to shun PNote route

Regulator Sebi today proposed relaxed entry norms for foreign portfolio investors (FPIs) willing to invest directly in Indian markets rather than through participatory notes.
It has proposed to ease some rules, including expanding the eligible jurisdictions for registration by including countries with diplomatic tie-ups with India.
Besides, the regulator has suggested for rationalising "fit and proper" criteria for FPIs as well as simplifying broad based requirements for such investors.
Further, it has proposed FPIs, operating under the Multiple Investment Managers (MIM) structure and holding foreign venture capital investors (FVCI) registration, to appoint multiple custodians.
The Securities and Exchange Board of India (Sebi) has sought comments from public till July 27 and a final regulation will be out in place after taking into views of all the stakeholders.

The move comes after the Sebi board last week approved proposals to float a discussion paper on easing registration of FPIs.

"It is proposed that the list of eligible jurisdictions in terms of FPI Regulations for grant of registration to Category I FPIs, may be expanded by also considering those jurisdictions, wherein Government of India has diplomatic tie-up and FEMA compliant jurisdiction," Sebi said.
Consequently, more jurisdictions such as other provinces in Canada would be able to access the market due to change in FPI Regulations.
The regulator has proposed that Category I and II FPIs, which are essentially government and regulated entities, should not need any additional documentation and procedural requirements. However, Category III FPIs should continue to be subject to such requirements.

It has proposed that rationale of broad based criteria should be extended in other cases wherein the applicant funds have other institutional investors -- sovereign wealth fund, insurance/reinsurance companies, pension funds, Exchange Traded Funds (ETFs) as their underlying investors.
Currently, an FPI is considered to be broad based in case such overseas investor has a bank as an underlying investor.
Broad based fund means a fund, established outside India, which has at least 20 investors, with no investor holding more than 49 per cent of the shares or units of the fund.
Now, Sebi has clarified on broad based requirements and said that in case such fund loses its status due to exit of some offshore global investors then it may not result in immediate loss of Category II status. Sebi said that three months time should be given to such funds to regain such status.

The regulator has proposed to discontinue the requirements of seeking its prior approval in case of change in local custodian or designated depository participants (DDPs).
At the time of change of local custodian/DDP, it has suggested that the new DDP should be permitted to rely on the registration granted by previous DDP at the time of transition. The move would avoid duplicate efforts and incremental documentation by the FPIs as well as the DDPs.
The regulator has proposed that private bank/merchant bank should invest on behalf of their clients provided details of beneficial owners are available and will be provided as and when required by regulators.

Besides, banks do not have any secrecy arrangement with investors and secrecy laws do not apply to the jurisdictions in which the bank is regulated for such relaxation.