Foreign Portfolio Investors - NSE · Foreign Portfolio Investors Investments in India. ......
Transcript of Foreign Portfolio Investors - NSE · Foreign Portfolio Investors Investments in India. ......
Foreign Portfolio Investors Investments in India
September 2015
Overview - Portfolio Investments in India
The Government of India announced for the first time the policy framework for foreign institutional investors permitting them to invest in the Indian listed entities which regime subsequently culminated into the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations 1995 (FII Regulations). Presently, foreign investors are allowed to invest in the Indian capital markets through different investment windows (foreign direct investment, portfolio investment scheme and foreign venture capital) investment, each of which has its own regulatory framework, licensing/registration requirements and investment conditions
Investment by the Foreign Institutional Investors (FIIs) in India was jointly regulated by the securities market regulator, the Securities and Exchange Board of India (SEBI), through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the nation’s financial regulator, the Reserve Bank of India, through the Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999
In order to reduce the overall complexity and number of regulations governing inbound investments, in 2014 SEBI have notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations) which aims to rationalize foreign investments made into India by the portfolio investors such as the FIIs and Qualified Foreign Investors
Regulatory Framework – Investments in India
Erstwhile Model
Foreign Institutional
Investors (FIIs)Sub-Accounts
of FIIs
Qualified Foreign
Investors (QFIs)
Foreign Portfolio Investors (FPIs)
Portfolio Investments
CurrentModel
Foreign Venture Capital Investor (FVCI)
Foreign Venture Capital Investor (FVCI)
Foreign Direct Investment
(FDI)
Venture Capital Investments
Direct/Strategic Investments
Foreign Direct Investment
(FDI)
No Change No Change
Eligibility Criteria of Foreign Portfolio Investor
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FPI should not be:
A non-resident Indian; and
A resident of a country listed in the specified public statementsissued by Financial Action Task Force
FPI should be:
A person1 not resident in India2;
A resident of a country whose securities market regulator is asignatory to International Organization of SecuritiesCommission’s Multilateral Memorandum of Understanding(Appendix A Signatories) or is signatory to bilateral Memorandumof Understanding with the SEBI;
Resident of a country whose Central Bank is a member of Bankof International Settlements in case of Bank applicant;
Legally permitted to invest in securities outside its home country;
Authorized by its Constitution documents / agreement toinvest on its own behalf or on the behalf of its clients;
A fit and proper person3 based on the criteria specified bySEBI; and
Grant of certificate to the applicant is in the interest of thedevelopment of securities market.
FPI should also have sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity
Fund having Non-Resident Indian (NRI) investors not prohibited to obtain registration
Private Banks and Merchant Banks allowed to undertake only proprietary investments
1The term “person” shall have the same meaning as assigned to it under section 2(31) of the Income-tax Act, 1961
2The term “resident in India” shall have the same meaning as assigned to it under section 6 of the Income-tax Act, 1961
3 An FPI shall be deemed as a ‘fit and proper person’ after taking into account the following criteria at the minimum in relation to the applicant, the principal officer and the key management persons:(a) integrity, reputation and character(b) absence of convictions and restraint orders(c) competence including financial solvency and networth
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Category of FPIs
FPI Category SEBI Fees(every 3 years)
Type of Investors Privileges & Restrictions
Category I
(Low Risk)
NIL This category shall include Government and Government related entities such as Central Banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.
Can issue Offshore DerivativeInstruments (ODIs)
Category II
(Moderate Risk)
USD 3,000 Regulated broad-based funds (please refer next slide) such as mutualfunds, investment trusts, insurance/reinsurance companies
Regulated persons such as banks, asset management companies,investment managers/ advisors, portfolio managers
Broad-based funds not ‘appropriately regulated’ (please refer next slide)but whose investment manager (including investment advisor or trustee)is appropriately regulated and registered as Category II FPI
University Funds, Pension Funds and University related Endowmentsalready registered with SEBI
Can issue ODIs,except non-regulated broad-based funds cannot issue / subscribe
Category III
(High Risk)
USD 300 All others FPIs not eligible under Category I and II such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices
Cannot issue ODIs
Broad-based fund means a fund established or incorporated outside India which fulfill following conditions at all times:
Sr. No Conditions Explanation
1 Should have at least 20 investors
To ascertain the number of investors in the Fund, direct and underlying investors are to be considered
Only investors of entities set-up for sole purpose of pooling funds and making investments are to be considered for ascertaining the underlying investors in the Fund
Funds having NRI as investor is not prohibited from obtaining registration
2 No single investor should hold more than 49 percent of the shares / units of the Fund
Institutional investor could hold more than 49 percent of the shares / units of the Fund as long as it is a broad based fund
• Conditional registration available subject to certain conditions and broad based criteria being met within 180 days
• FPI deemed broad based if it has a bank as an investor
Appropriately Regulated means an applicant falling in Category II regulated or supervised by the securities market regulatoror the banking regulator of the concerned foreign jurisdiction, in the same capacity in which it proposes to make investments in India
Definitions
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Registration Process
Registration Conditions
Documents needed from FPIs for registration
• FPI application form
• Declaration and undertaking
• Ultimate Beneficial Owner (UBO) letter
• Constitution documents including evidence of being regulated
• Prospectus/ Offering Memorandum of the Fund (in case of funds)
• PAN card instruction to open FPI account
• KYC documents as per Applicant category
Registration discussion to invest in the
Portfolio Route
1
Applicant sends soft copy of the documents for FPI registration for review
to DDP in India. Applicant also makes application for Permanent Account
Number (PAN) card through their tax advisor
2
Applicant clarifies on feedback and queries
raised
4
Fees paid by Applicant to DDP for
registration
5
FPI registration is granted to the
Applicant
6DDP applies for trading codes
and sends confirmation to the FPI once accounts are
opened
7
Account details shared by the FPI with their brokers who would be executing
their trades on the exchange
8 Go live with market trades
9
DDP checks the registration
documents and provides feedback
3
• An applicant (newly incorporated / established) whointends to register as Category II FPI but does not meetbroad-based criteria, may apply for conditional registrationwith a validity of 180 days if it is an India dedicated fund,or undertakes to:
- make investment of atleast five percent corpus of thefund in India; and
- comply with the broad-based criteria before thevalidity of its conditional registration i.e. within 180days
• In case DDP issues acknowledgement regarding fulfilmentof broad-based criteria, the conditional registration shall betreated as registration
• If the FPI fails to meet the broad-based status within 180days, it will be reclassified as Category III FPI
• If an existing broad-based fund registered as Category IIFPI, ceases to remain broad-based on account ofredemption etc., it will have to fulfill criteria mentionedabove for conditional registration
• FPIs who meet the following conditionsshall not be treated as having opaquestructure :
- are regulated in its homejurisdiction;
- each fund or sub fund in theapplicant satisfies broad basedcriteria; and
- gives an undertaking to provideinformation regarding its beneficialowners as and when SEBI seeksthis information
• DDPs shall not allow entities having opaque structure (wherein details of ultimate beneficiary owners are not known or where the beneficial owners are ring fenced from each other etc.) to register as FPIs
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Know Your Client Norms - FPI
Key differences - FII & FPI Regulations
Document Type Category - I Category - II Category - III Erstwhile KYC requirement
Entity Level
Constitutive Docs Required Required Required Required
Proof of Address Power of Attorney mentioning address is acceptable
Power of Attorney mentioning address is acceptable
Power of Attorney mentioning address is acceptable
Required
PAN Card Required Required Required Required
Financials *Exempt *Exempt Risk Based-Financial data sufficient Required (Exempt for SWFs)
Board Resolution to invest in India
*Exempt Required Required Not Required
Uniform Know YourClient (KYC) Form
Required Required Required Required
Senior Management (Whole Time Directors/ Partners/ Trustees/etc)
List of personnel Required Required Required Required
Proof of identity *Exempt *Exempt Entity declares on letterhead - Full name, nationality and Date of Birth or Proof of Identity
Required
Proof of Address *Exempt *Exempt Declaration on Letter head Required
Photographs *Exempt *Exempt *Exempt Required
Authorized Signatories
List & Signatures Required Required Required Required
Proof of identity *Exempt *Exempt Required Not Required
Proof of Address *Exempt *Exempt *Declaration on Letter Head Not Required
Photographs *Exempt *Exempt *Exempt Only photograph of signer on the KYC form is required in page 1
Ultimate Beneficial Owner (UBO)
List *Exempt Required (can declare no UBO over 25%)
Required Required (Exempt for SWFs)
Proof of identity *Exempt *Exempt Required Not Required
Proof of Address *Exempt *Exempt *Declaration on Letter Head Not Required
Photographs *Exempt *Exempt *Exempt Not Required
* Not required for cash account opening. However, FPIs must submit an undertaking that upon demand by Regulators/Law Enforcement Agencies the relative documents would be submitted to the DDPs
Particulars Erstwhile FII Regulations Current FPI Regulations
Regulatory Structure 2 Tier Structure - Main FII and sub-accounts No tiers
Registering Institution SEBI DDP on behalf of SEBI
Issuance of ODIs (Participatory Notes)(Please also refer next slide) Only permitted for Main FIIs Permitted for Category I and Category II FPIs
except unregulated broad-based funds
KYC Procedure Uniform KYC Risk based KYC
Permitted Investments
Equity, Government Securities, Corporate Debt, Mutual Funds, Listed equity derivatives, Securities Lending and Borrowings, Interest Rate Future, Indian Depository Receipts, Security Receipts, Rupee bonds or units issued by Infrastructure Debt Fund, Commercial Paper
Same as FII (except unlisted equity). Additionally, FPIs are also permitted to do currency-risk hedging
Investment Limits and restrictions
• For any portfolio investing entity up to 10 percentof paid-up capital of the company
• Aggregate FII investment limit of 24 percent ofpaid-up equity capital in a company (extendable tosectoral cap)
• For any portfolio investing entity below 10percent of paid-up capital of the company
• Aggregate investment limit of 24 percent ofpaid-up equity capital in a company(extendable to sectoral cap)
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Issuance of ODIs
Investment Limits and Restrictions
• No FPI may issue, subscribe to or otherwise deal in ODIs,
directly or indirectly, unless such ODIs are issued:
– only to persons who are regulated by an appropriate foreign
regulatory authority;
– after compliance with KYC norms
• Category I & II FPIs (other than unregulated broad based funds)can issue, subscribe to or otherwise deal in ODIs
• ODIs issued before start of the FPI Regime as on 7 January2014 as well as the existing ODI subscribers as on that dateare grandfathered
• ODI issuers may continue to issue ODIs to those subscriberseven if there is a change in their investment manager, providedthe incumbent is a regulated entity
• ODI issuer can issue ODIs to existing entities, which wereregistered as clients but did not have positions as on 7 January2014
• FPIs to fully disclose to SEBI, information concerning theparties to ODIs and terms of issue
DEBT
Instrument Eligible Investor Limit Remarks
Government Securities FPIs and Long term investors– Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks
USD 25 billion
Eligible investors permitted to make investments in government securities/ bonds with a minimum residual maturity of three years.
Government Securities- long term FPIs which are Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks
USD 5 billion Eligible investors permitted to invest only in dated securities of residual maturity of one year and above.
Note:• FPIs are permitted to invest in Government Securities, the coupons received on investment in Government Securities.•
•
The coupons invested in purchasing Government securities shall be classified into a separate investment category which is over and above the USD 30 billion Governmentdebt limitFor the purpose of investment of coupons, the FPIs shall have an investment period of 5 working days from the date of receipt of the coupon. A re-investment facility of 5working days shall be provided on the Government securities that have been purchased by utilizing the coupons
• Coupons received on these Government securities purchased by investment of coupons shall also have the same facility
Corporate DebtFPIs and Long term investors –SWFs, Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks
USD 51 billion
Investment in Commercial Papers permitted only up to USD 2 billion within the limit of USD 51 billion
Eligible Investors permitted to make investments in corporate bonds with a minimum residual maturity of three years
FPIs are not permitted to make any further investments in liquid and money market mutual fund schemes
No lock-in period and FPIs be free to sell the securities (including those that are presently held with less than three years residual maturity to domestic investors
Total USD 81 billion
EQUITY• Holding of equity shares of each company by any portfolio investing entity shall be below 10 percent of paid-up capital of the company
• Aggregate FPI investment limit of 24 percent of paid-up equity capital in a company (extendable to sectoral cap)
• FPIs cannot invest in unlisted and physical securities
Note: FPIs are barred from making investments in Treasury Bills
How KPMG can assist
• In identifying suitable jurisdictions for setting-up funds forinvestment in India and also provide assistance in implementingthe identified investment structure
• In review of FPI application etc. to Designated DepositoryParticipant (DDP)
• In obtaining a PAN
• We have a specialized dedicated team working to accurately andexpeditiously perform computation of capital gains tax liability onthe sale transactions executed by the FPI
• Computing and assisting in monitoring advance tax payments
• Assisting in preparing and filing of annual tax returns
• Assisting in audit/ appellate proceedings before the tax authorities
• Timely updates on tax and regulatory developments
We actively participate in the meetings with the Regulators - Department of Financial Services, Department of Economic Affairs, Ministry of Finance, Government of India, SEBI and Reserve Bank of India
Why KPMG
We have been providing services to over 800 FII and sub-account clients over a decade
Dedicated teams of professionals who efficiently manage the ongoing tax compliance requirements of FPIs in India. Our team of experts has an in-depth knowledge of local laws, as well as practical experience with issues relating to FPIs investments into India
We have good working relationships with all the leading Indian DDPs / custodians providing custody services to FPIs investing into India.
Conduct road shows along with local custodian bankers to update on India tax developments
Regular flash alerts and knowledge sharing calls on tax and regulatory matters including Indian Budget.
This presentation is prepared solely for informational purposes. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Notice to the reader:
Thank you
Key Contact
Naresh MakhijaniPartnerFinancial ServicesT: +91 22 3090 2120M: +91 98923 33376E: [email protected]
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