Securities and Exchange Board of India (SEBI) is a regulatory body. It is tasked with the responsibility of regulating and developing the securities market in India. Furthermore, SEBI is also responsible for managing the foreign investments in India.
For this purpose, the Securities and Exchange Board of India introduced the SEBI (Foreign Portfolio Investors) Regulations, 2014. However, it is now replaced by the SEBI (Foreign Portfolio Investors) Regulations, 2019.
In this article, we will understand what the SEBI (Foreign Portfolio Investors) Regulations, 2019 is all about. Furthermore, we will also discuss the recent amendments.
Why were SEBI (Foreign Portfolio Investors) Regulations Introduced?
India being a developing nation, is one of the fastest growing investment destinations for global investors. With increased stability on the foreign investment front, international investors and businesses are exploring greater opportunities. To encourage foreign inflows to the secondary market has always received special attention as an efficient securities market plays a significant role in the growth of an economy.
The opening of Foreign Direct Investment (FDI) has led to the introduction of Foreign Portfolio Investment Regulations. This will make India a more attractive destination amongst international markets.
For the purpose of encouraging and simplifying foreign portfolio investment, SEBI introduced the SEBI (Foreign Portfolio Investors) Regulations, 2014.
Difference Between FDI, FPI and FII
Before going through the the SEBI FPI Regulations, let us first understand the difference between FDI, FPI and FII.
Foreign investment in India can either be in the form of FDI or FPI. FDI refers to Foreign Direct Investment whereas FPI stands for Foreign Portfolio Investment.
Whether the foreign investment will be classified as FPI or FDI is determined by the percentage of investment in the Indian company’s capital instruments.
Meaning of FDI
For FDI, the investment is through capital instruments by a person resident outside India:
- in an unlisted company or,
- in 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
Meaning of FPI
In an FPI, the investment is through capital instruments of a listed Indian company by a person resident outside India which is less than 10% of
- the post issue paid-up equity capital on a fully diluted basis or,
- the paid up value of each series of capital instruments
Meaning of FII
- Foreign Institutional Investor (FII) was a category of investors, along with Sub-accounts of FII and Qualified Foreign Investors (QFI) initially used by the Government.
- However, the Government of India merged 3 investors’ classes of foreign investors, viz. “FII”, “Sub-accounts of FIIs” & “QFI” and created Foreign Portfolio Investor (FPI), under SEBI (Foreign Portfolio Investors) Regulations, 2014.
- Presently, in India, the term Foreign Portfolio Investor (FPI) refers to FIIs or their sub-accounts, or qualified foreign investors (QFIs).
Points to Note for FDI and FPI
- Irrespective of the percentage of investment, foreign investment in an unlisted Indian company will always be classified as FDI.
- On the other hand, for an FPI investment, once the investment is classified as FDI (on account of total holding increasing later), and if the FDI holding comes back to less than 10%, it will continue to be classified as FDI then –once an FDI, always an FDI.
- Since FPI investment is more short term in nature, to take advantage of varying returns between nations, it is referred to as hot money.
- FPI is regulated by SEBI (FPI) Regulations, 2014 and FDI is regulated by FEMA, 1999 under RBI.
Amendments in SEBI (Foreign Portfolio Investors) Regulations
SEBI (Foreign Portfolio Investors) Regulations, 2019
- Earlier the Foreign investors wanting to make investments in the Indian capital markets had to obtain an FPI license.
- This license was granted by the local custodian on behalf of the capital market regulator, i.e. SEBI with respect to the eligibility criteria, categories of registration, key investment conditions and restrictions, etc.
- Therefore, on September 23, 2019, for the purpose of further simplifying the FPI investments to India and to boost the FPI participation in the secondary market, SEBI issued revised FPI regulations as the SEBI (Foreign Portfolio Investors) Regulations, 2019. The new regulations became effective on the date of issue and replaced the SEBI (Foreign Portfolio Investors) Regulations, 2014.
- Moreover, the FPI Regulations, 2019 have to be read with Operating Guidelines for its effective implementation.
The important changes in the amended regulations are as follows-
Other Important Amendments–
SEBI (Foreign Portfolio Investors) Regulations Amendment, 2022
- SEBI has recently made amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2019.
- The SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2022 came into force on the date of their publication in the Official Gazette i.e. January 14, 2022.
- A new Regulation, Regulation 43B has been inserted into the FPI regulations.
- Regulation 43B will allow SEBI to grant relaxation from strict enforcement of any of the provisions of these regulations. This is because, currently there are no provisions in the law to provide exemptions to FPIs.
- However, the Board has to be satisfied that: (a) non-compliance by an FPI is caused due to factors beyond the control of the entity; or (b) the requirement is procedural or technical in nature.
- Furthermore, an application seeking relaxation under Regulation 43B must be accompanied by a non-refundable fee of USD 1,000 payable by way of NEFT/ RTGS/ IMPS or any other mode allowed by the Reserve Bank of India.
To sum up, the purpose of introducing the SEBI (Foreign Portfolio Investors) Regulations and the Operating Guidelines was to simplify the processes for FPI including compliance requirements. This regulation and the amendments will encourage new foreign portfolio investment participants in India.
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