INDIA: SEBI proposals on harmonisation of India foreign investment procedures

Monday October 8 2012

In a Board meeting of 6th October, SEBI announced that it will prepare a draft guideline based on the guidance of the Working Group on India Foreign Investment in India, for consideration of the Government so that uniform guidelines are made for various categories of investors such as FII, FVCI, NRI, QFI etc.

The Report of the Working Group on Foreign Investment was published on 30th July 2010. The major recommendations regarding the framework and administration of capital flows were to:

1. Create a single window for registration and clearance of portfolio investment regulations that does not distinguish between investor classes.

(a) Qualified depository participants (“DPs”), with global presence through branch network and agency relationships would be legally responsible for enforcing OECD-standard KYC requirements;

(b) Such global DPs would have higher capital requirements and would need to pass a detailed “fitness test” administered by SEBI;

(c) FIIs, FVCIs and NRIs would be abolished as an investor class.

2. Clarify that investment into listed or unlisted securities at a level below 10 percent of shares would be considered portfolio investment. Investment above 10 percent would be considered FDI and would require compliance with existing FDI rules, regulations and procedures;

3. Promulgate broader KYC requirements that meet Organisation for Economic Co-operation and Development (“OECD”) standards of best practices. These requirements would combine adherence to Prevention of Money Laundering Act (“PMLA”) rules and regulations as well as information required for market monitoring by all regulators of financial services into one master file;

4. Closely review sectors where limits set by FDI and portfolio investment policy overlap;

5. Consistent with Lahiri Committee recommendations, in areas where there are no separate ceilings by an Act of Parliament, QFI investment ceilings should be reckoned over and above prescribed FDI sectoral caps;

6. Examine closely areas where regulations tailored to a particular type of institution would be incorporated, modified or subsumed by the larger QFI framework.

For example,

(a) Grandfather existing FVCI investments to avoid business discontinuity for existing firms;

(b) Consider amending the consolidated FDI Policy to exempt SEBI registered QFIs from seeking approval of the Government prior to investing in a DVF incorporated as a trust;

7. With regard to participatory notes, SEBI should have the final right to demand details about the end investor in cases of needed investigations.

Click here for the Report.