Move to enhance Dollar flows to India.
By Rajiv Theodore
NEW DELHI: It would soon become easier for foreigners to invest in Indian markets. The Indian market regulator, SEBI is giving its finishing touches to the changes by the government which had done a major overhaul of the rules governing overseas investments. These moves come at a time when the country is facing a crisis in outflows of foreign capital and weakening of the rupee against the dollar.
Under the new norms, which are likely to be announced next week, the Securities and Exchange Board of India (SEBI) is creating a new class of investors — to be called Foreign Portfolio Investors (FPIs) — and would classify them in three categories as per their risk profile.
The categories are low-risk (for multi-lateral agencies, government and other sovereign entities), moderate risk (for banks, asset management companies, investment trusts, insurers, pension funds and university funds) and high-risk (all the FPIs not included in the first two categories).
The third-category FPIs would not be allowed to issue Participatory Notes. The KYC requirements would be simplest for the first category and most stringent for the third class. The KYC (Know Your Client) and other regulatory compliance requirements for the FPIs would depend on their risk category and the norms would be easier for lower-risk investors. Sebi is merging different classes of investors such as FIIs, their Sub Accounts and Qualified Foreign Investors (QFIs) into a new category, FPIs, to put in place a simplified and uniform set of entry norms for them.
The regulator had earlier sought certain changes in the provisions of the Prevention of Money Laundering Act, as also in the norms for taxation responsibility under the FPI regime, to facilitate the framing of new norms. As per the new regulations, any portfolio investments would be defined as investment by any single investor or investor group, if they do not exceed 10% of the equity of an Indian company. Besides, any investment beyond the threshold of 10% shall be considered as Foreign Direct Investment (FDI).
The proposals are based on former cabinet secretary K M Chandrashekhar committee report and were approved by Sebi in its board meeting in June end. Thereafter, the regulator referred the recommendations to the Government of India for implementation.
The SEBI announcement comes in the wake of a similar move to enhance dollar inflow into India. RBI governor Raghuram Rajan on Friday had liberalized investment norms for foreign strategic investors holding substantial stake in an Indian company to further increase their stakes in the same company without prior approval of the central bank.
The move again aims to enhance dollar flows into India and reduce time taken by such investors in making investments in Indian stocks. Earlier, such investors had to seek prior permission from the RBI before increasing their stake in an Indian company. This created the risk of the news getting out early, thereby raising the stock’s price, which in turn could make the acquisition more expensive for the investor.
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