Foreign funds with 'opaque' structures can't invest in India
New Delhi: As Indian capital markets gear up for a streamlined structure for overseas investors, foreign funds with 'opaque' structures would not be allowed to come in under the new FPI (Foreign Portfolio Investor) regime.
This new regime would kick in from next month and provides for existing overseas investor classes such as FIIs (Foreign Institutional Investors), their sub-accounts and QFIs (Qualified Foreign Investors) to become FPIs.
Besides, all new foreign investors wishing to invest in Indian markets would also need to register as FPIs, which have been divided into three categories as per their risk profiles.
According to a detailed note prepared by capital markets regulator Sebi for this new regime, "opaque structures" will not be eligible to register as FPIs.
It has been noticed in the past that some overseas entities use complex multi-fund structures to invest in India. There have been apprehensions about possible round-tripping or money laundering activities through such structures such as multi-class share vehicle (MCV) or protected cell companies (PCCs).
PCCs are specially designed entities that might comprise various cells, having funds of various investors, in such a manner that there is legal segregation and protection of assets and liabilities for each cell.
According to Sebi, the FPIs would need to submit declaration and undertakings that they were not operating as PCCs, MCVs or any such equivalent structures.
"However, an FPI applicant will not be considered as opaque structure and will be considered for grant of registration if it is required by its regulator or under any law to ring fence its assets and liabilities from other funds/sub funds," Sebi said.
Such applicants shall be eligible to be register as FPIs only upon meeting certain conditions. These include the applicant being regulated in its home jurisdiction and each fund or sub-fund satisfying broad-based eligibility criteria.
Besides, such applicants would also need to give an undertaking to provide information regarding its beneficial owners as and when Sebi seeks this information, Sebi said.
Under the new regime, select FPIs (excluding high-risk profile entities) would also be allowed to issue participatory notes.
P-Notes, or offshore derivative instruments, are mostly used by overseas HNIs, hedge funds and other foreign institutions to invest in Indian markets through registered FIIs, while saving on time and costs associated with direct registrations.
To ensure a seamless transition, the 'unregulated' foreign funds which have already been issued offshore derivative instruments under the existing FII regime have been allowed to continue to make use of the tool.
The regulator has barred fresh issuance of offshore derivative instruments to "unregulated" foreign funds.
"The ODI (offshore derivative instruments) positions under FII Regulations can continue under the Foreign Portfolio Investors (FPI) regime.
"Also the subscribers who have subscribed to ODIs under FII Regulations can continue to subscribe to ODIs under the FPI regime," Sebi said in a detailed note on its new FPI guidelines which would come into force from next month.
The Securities and Exchange Board of India (Sebi) said that existing entities which did not have positions through P-Notes, can continue to be issued these instruments to registered clients.
"ODI issuers may continue to issue ODIs to those subscribers even if there is a change in their investment manager, provided the incoming investment manager is a regulated entity," Sebi said.
The regulator also said that Category-I FPIs, which deal with entities backed by foreign government can issue, subscribe to or otherwise deal in ODIs in the same manner as it is being presently done under the FII regime.
Sebi, however, had prohibited certain entities under 'Category-II,' or medium-risk investors, from issuing P-Notes.
"Provided that those unregulated broad-based funds, which are classified as Category-II foreign portfolio investor by virtue of their investment manager being appropriately regulated, shall not issue, subscribe or otherwise deal in offshore derivatives instruments directly or indirectly," Sebi had said.
The new FPI regime has classified foreign investors into three groups based on their risk profile and would eventually replace existing categories such as FIIs, their sub-accounts and qualified foreign investors (QFIs).
Existing overseas investors such as FIIs, sub-accounts and QFIs will have to convert to the new regime eventually.
Category-I will be the lowest risk category comprising foreign governments and government-related foreign investors.
Category-II FPIs will include regulated entities, broad- based funds whose investment managers are regulated, university funds, university-related endowments and pension funds. All other FPIs would come under Category-III.