Tuesday September 27 2016

News Source: Global Disclosures

Focus: Foreign Investment

Type: General

Country: India




The Securities and Exchange Board of India (SEBI) Board recently met in Mumbai and made important changes with respect to foreign investment rules for funds and corporate bonds, which include increasing the limit of foreign investment in Indian stock exchanges to encourage the National Stock Exchange (NSE) to speed up its listing on domestic and foreign bourses. 

Permitting Foreign Portfolio Investors (FPIs) to trade directly in Corporate Bonds without a broker

SEBI has amended the regulations to permit FPIs to trade directly in Corporate Bonds without requiring an intermediary broker.

Regulation 21(4)(d) of the FPI Regulation states that “the transaction of business in securities by a foreign portfolio investor shall be only through stock brokers registered by the Board.” Furthermore, the broker is required to be a qualified member of a Recognised Stock Exchange (RSE) in accordance with Rule 8 of the Securities Contracts (Regulation) Rules, 1957.

Category I and Category II FPIs will have an option to directly access the corporate bond market without brokers, which has been afforded to domestic institutions such as Banks, Insurance Companies, Pension Funds etc. Access to Over-the-Counter (OTC), Request for Quote (RFQ) and Electronic Book Provider (EBP) platforms of RSE will be provided to FPIs only for proprietary trading and participation of FPIs will help in deepening the Corporate Bond market.

In order to facilitate growth of Infrastructure Investment Trusts (InvIT) and Real Estate Investment Trusts (REIT), SEBI has approved certain changes to regulations, which include:

Amendments to InvIT Regulations

(i) Allowing an InvIT to invest in a two level special purpose vehicle structure through Holding Company (Holdco), subject to sufficient shareholding in the Holdco and the underlying SPV and other safeguards including:

  • InvIT to have the right to appoint majority directors in the SPV(s);
  • Holdco to distribute 100% of cash flows realised from underlying SPVs and at least 90% of the remaining cash flows

(ii) Reducing mandatory sponsor holding in InvIT to 15%; and

(iii) Removal of the limit on the number of sponsors of InvIT.

Amendments to REIT Regulations

(i) Allowing REITs to invest in a two level special purpose vehicle structure through a Holding Company (Holdco), subject to sufficient shareholdings in the Holdco and the underlying SPV and other safeguards including the following:

  • REIT to have the right to appoint majority directors in the SPVs; and
  • Holdco to distribute 100% of cash flows realised from underlying SPVs and at least 90% of the remaining cash flows;

(ii) Remove the limit on the number of sponsors and introducing the concept of sponsor group; and

(iii) Allowing REITs to invest up to 20% in under construction assets.

Consultation Paper for “Amendments/ clarifications to the SEBI (Investment Advisers) Regulations, 2013”

SEBI has approved a consultation paper proposing certain changes and clarifications in the Investment Advisors Regulations, 2013, (IA Regulations) which includes the following:

(i) A review of the exemption from registration as an investment adviser provided to Mutual Fund Distributors and SEBI registered intermediaries for providing investment advice as an incidental activity to their primary activity.

(ii) Granting of a time period of three years to mutual fund distributors who seek to migrate as an investment adviser so as to enable them to obtain necessary certification and comply with other IA Regulations.

The consultation paper will be placed on SEBI website for public comment.

Framework for registration of fund managers for overseas funds

This provides that fund management activity carried out through an Eligible Fund Manager located in India acting on behalf of an Eligible Investment Fund (‘overseas fund)’ shall not constitute a business connection in India of such fund subject to the fund and the fund manager meeting certain specified conditions.

SEBI had issued a consultation paper on June 21, 2016 to seek public comments for laying down a framework for registration of Eligible Fund Managers.

SEBI has also indicated that it will set up rules for listed companies backed by private equity (PE) firms to seek approval from shareholders for compensation pacts with founders, directors and top management, following complaints by minority investors against compensation agreements entered into with early bird foreign equity investors.

Please click the link at the top of the page for more information.