FPIs may get easier access to Indian markets

FPIs may get easier access to Indian markets

Foreign portfolio investors (FPIs) could soon have easier access to Indian markets. A Securities and


Board of India (


) expert panel is set to propose liberalised rules establishing a fast-track registration process for


besides allowing them to invest in different classes of securities having more flexible structures, said a person close to the development.

“Under the fast-track process, FPI applications will be processed within a few days and verification of documents will be carried out post-facto, unlike the current system which takes weeks,” the person said. “The eligible documents list is also being rationalised.”

It currently takes three to four weeks or even longer to grant licences to FPIs as they have to await procedures such as notarisation of documents.

Some FPI categories such as sovereign wealth funds currently have an easier registration process and the thinking is that this should be extended to others as well, such as those from jurisdictions that are well-regulated and compliant with FATF (Financial Action Task Force) anti-money laundering norms.

FPI snip 1

Expanded Range of Securities

“The devil will lie in the detail of how this proposal is implemented, since the DDP (designated depository participant) will need to run at least a prima facie assessment of eligibility, if the licence is issued before complete KYC (know-your-customer) checks are undertaken,” said Shruti S Rajan, partner, financial regulatory practice,

Cyril Amarchand Mangaldas

. “A limited rollout for Category 1 FPIs may be a good place to start this with, since this is a low-risk category. There should also be a clear plan of action for cases where the FPI is found ineligible after complete checks are undertaken and the divestment window made available.”

This approach may not chime with the single, combined application form released by the ministry of finance recently for FPIs, which aims to consolidate KYC, FPI registration and PAN (the permanent account number tax ID), she said, adding that changes will need to be made to allow for a fast-track process.

The Sebi panel headed by former Reserve Bank of India deputy governor HR Khan is also planning to expand the range of securities that FPIs can participate in and allow them to set up shop in the Gujarat International Finance Tec-City (GIFTIFSC). “The thinking is FPIs should be allowed to invest in municipal bonds and debt securities in REITs (real estate investment trusts) and InVITs (infrastructure investment trusts),” said the person cited above.

The existing rules don’t explicitly cover FPI investments in debt securities of REITs and InVITs.

“It is a good move to facilitate easier onboarding of FPIs to attract investments into India, especially in the current context,” said S Raman, former wholetime Sebi member, who was part of some of the committees formed to review FPI regulation. “I would like to think that once it is decided to simplify onboarding of an FPI (pending post-facto KYC verification), such an FPI should be allowed to make investments in all the permissible instruments. Maybe some monetary limits may be prescribed for each individual FPI (till completion of KYC formalities) if some safeguards are considered necessary. This way, the optics as also the effectiveness of the proposed measure would be a lot better.”

The panel is also taking a relook at protected cell companies (PCCs) and multi-class share vehicle (MCV) structures. A PCC has several cells with segregated and protected assets, ringfenced from each other. This was banned after being allegedly misused by corporates for roundtripping of funds. An MCV is allowed with restrictions after an undertaking is given by the FPI.

“Today, the beneficial owner is known anyway,” said the person cited above. “The thinking is there should be flexibility allowed in such structures and they should be allowed only for regulatory requirements.”

Lawyers said even though the beneficial ownership conundrum has largely been resolved, bringing PCCs back in the running for FPI licences could be fraught with challenges.

“For one, in a PCC, which has ringfenced cells, the key issue will be how to identify the beneficial ownership of the legal entity as a whole (and hence, the investments flowing into India),” Rajan said. “My sense is that even if this route is relaxed, the regulatory expectation is likely to be BO (beneficial owner) identification for each cell/segregated portfolio, separately.”

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