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Move over QFI, Goodbye FII, Welcome aboard FPI

, August 19, 2014, 0 Comments

FPI Indian Economy-MarketExpressAfter a rather unsuccessful attempt in attracting more foreign investors under the Qualified Foreign Investors (QFI) route, the government yet again has decided to attract foreign investors to India under the Foreign Portfolio Investors (FPI) Route.

In December 2012, SEBI formed a committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments, headed by Mr. K. M. Chandrasekhar. Honourable Finance minister on the same lines, in Budget 2013 announced intention of SEBI to simplify the procedures and prescribe norms to unify portfolio investment routes. The SEBI committee submitted its report and recommendations where approved in June 2013. Come Jan 2014, SEBI, officially issued the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014. The notified regulations are supposed to unify portfolio investments by all foreigners except Non-Resident Indians (NRI) and are also suppose to simplify registration procedures.

Who is an FPI ?
An FPI has been defined to mean a person who satisfies the prescribed eligibility criteria and has been registered under the FPI Regulations. All existing Foreign Institutional Investors (FIIs) and QFIs are to be merged into one category called FPI.

FPI QPI FII-marketexpress-in

Eligibility Criteria for FPI
An applicant desirous of FPI registration should, inter alia, satisfy the following conditions:

  • It should not be resident in India or a Non-Resident Indian.
  • It should be a resident of a country:
    −whose securities market regulator is a signatory to IOSCO’s Multilateral MOU or a  signatory to a bilateral MOU with SEBI;

−whose central bank is a member of the Bank for International Settlements;

−against whom the Financial Action Task Force (FATF) has not issued any warnings

  • It should legally be permitted to invest in securities outside the country of its incorporation or establishment or place of business.
  • It should be authorized by its Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients.
  • It must be a fit and proper person as prescribed.

Categories of FPI

FPI Category Type of Investors SEBI Fees
(Payable every 3 Years)
Category I Government and Government-related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organisations or agencies. NIL
Category II − appropriately regulated broad based funds such as mutual funds, investment trusts,insurance/reinsurance companies;

− appropriately regulated persons such as banks, asset management companies, investment managers/advisors, portfolio managers;

− broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated. However, the investment manager of such broad based fund should be registered as a Category II FPI and should undertake that it shall be responsible and liable for all acts of commission and omission of all its underlying broad based funds and other deeds and things done by such broad based funds under these regulations.

− university funds and pension funds; and

− university-related endowments already registered with SEBI as FIIs or sub-accounts

Category III All others not eligible under Category I and II FPIs such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices. $300

Operating Procedure for FPI

Rather than going through SEBI, FPIs now have to come through DDP (Designated Depositary Participant). Application to the DDP has to be made by Foreign investor for any one of the above categories. KYC guidelines are significantly simplified for Category II & III and are virtually not required for Category I investors.

The other significant change is in terms of Order Routing. Earlier, all QFIs had to route the orders to through the custodian, now just like FII, FPI can direct place the order with the broker.

Some of the key obligations for FPI include appointing a Compliance Officer to ensure compliance with FPI Regulations, appoint a CA in India for PAN Card and Tax Related Obligations and enter in to an agreement with a DDP to act as custodian.

Impact on existing investors (FII, sub account & QFI)

FII : Existing FIIs can continue to buy and sell securities till the expiration of their certificate. However, they need to convert into FPI before the expiry of certificate.

Sub Account : Can continue to buy and sell securities till the validity of existing registration. However, they need to convert into FPI before the expiry of their registration.

Qualified Foreign Investors (QFI) : Have to register as FPI before Jan 06, 2015.

Key comparisons

  Qualified Foreign Investors (QFI) Foreign Institutional Investors (FII) Foreign Portfolio Investors (FPI)
Registration No SEBI Registration SEBI Registration Registration through DDP
Access Fee NO Access Fee Access Fee every 3 Years Access Fee every 3 Years
Order Placement Through QDP Directly to Broker Directly to Broker
Permitted Investments Equity, Government Bonds, Corporate Debt, MFs Equity, Government Bonds, Corporate Debt, MFs, Listed equity derivatives, SLB, Interest Rate Futures, IDRs, Same as FII (unlisted equity not permitted)
KYC Uniform KYC Uniform KYC Risk Based KYC
Eligibility All investor categories – Retail & Institutional
Investors from jurisdictions
1.FATF compliant, including GCC/EC
member countries 2.Signatory to IOSCO MMOU / SEBI MOU
Specified categories of institutional and retail investors
-FII to be regulated by Securities regulator that is signatory to IOSCO MMOU / SEBI MOU
-One year track record prior for FII registration
All investor categories
Investors from jurisdictions:
1.Not in FATF (high risk and non-compliant countries)
2.Signatory to IOSCO MMOU / SEBI MOU
3.For banks – central bank is member of BIS

Significant changes have been made in order to attract capital investments in India. Risk Based KYC, ease of order routing and Tax treatment on same lines as FII will be some of the main attractions for Foreign Investors who were apprehensive about entering India.

Favourable Macro & Political climate will also attract Retail and other smaller Fund Structures into India who can now access capital markets directly under the FPI Regulations. FPI Route is definitely here to stay for the long run.