QFI (Qualified Foreign Investor)

Who are QFI’s?

Definition

Para 3.1 of SEBI circular Cir/IMD/DF/14/2011 dated August 09, 2011 defines QFI’s as follows:

Qualified Foreign Investor (QFI) shall mean a person resident in a country that is compliant with Financial Action Task Force (FATF) standards and that is a signatory to International Organization of Securities Commission's (IOSCO’s) Multilateral Memorandum of Understanding (MMOU).

Provided that such person is not resident in India,

Provided further that such person is not registered with SEBI as Foreign Institutional Investor or Sub account.

Explanation - For the purposes of this clause:

(1) the term "Person" shall carry the same meaning under Section 2(31) of the Income Tax Act, 1961

(2) the phrase “resident in India” shall carry the same meaning as in the Income Tax Act, 1961

(3) “resident” in a country, other than India, shall mean resident as per the direct tax laws of that country.

Section 2(31) of the Income Tax Act, 1961 defines person as follows-

"Person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

[Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not

such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;]

The RBI circular provides that SEBI registered FIIs and FVCIs would not qualify as a QFI. However, the SEBI circular only provides that a registered FII or sub-account would not be eligible to qualify as a QFI, and has no mention of FVCI’s. This discord amongst the rules prescribed by the two regulators continues to prevail under the New FDI Policy, which bars both, FIIs and FVCIs from qualifying as a QFI.

 The QFIs shall include individuals, groups or associations, resident in a foreign country which is compliant with FATF and that is a signatory to IOSCO’s multilateral MoU. QFIs do not include FII/sub-accounts and FVCI’s.

List of common countries that are FATF compliant and are signatories of IOSCO Multilateral MOU 1

1. Australia 2. Finland

3. Luxembourg 4. South Africa

5. Austria 6. Germany

7. Mexico 8. Spain

9. Belgium 10. Greece

11. New Zealand 12. Sweden

13. Brazil 14. Hong Kong

15. Norway 16. Switzerland

17. China 18. India

19. Portugal 20. Turkey

21. Denmark 22. Italy

23. Japan 24. Republic of Korea

25. United Kingdom 26. France

1 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india2-jan-19-2012.pdf

27. Kingdom of the Netherlands 28. Singapore

29. United States of America

Procedure of Recognition

Eligible transactions for QFI

The DP shall ensure that transactions of QFI are limited only to the following:

Purchase of equity shares in public issues, to be listed on recognised stock exchange(s). Purchase of listed equity shares through SEBI registered stock brokers, on recognized

stock exchanges in India. Sale of equity shares which are held in their demat account through SEBI registered stock

brokers. Purchase of equity shares against rights issues. Receipt of bonus shares or receipt of shares on stock split/ consolidation. Receipt of equity shares due to amalgamation, demerger or such other corporate actions,

subject to the investment limits. Receipt of dividends. Tender equity shares in open offer in accordance with SEBI (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011. Tender equity shares in open offer in accordance with SEBI (Delisting of Equity Shares)

Regulations, 2009. Tender equity shares in case of buy-back by listed companies in accordance with SEBI

(Buyback of Securities) Regulations, 1998 In order to invest they will hold equity shares in a demat account opened with a SEBI

registered qualified Depository Participant.

Key features of new QFI scheme

The QFI regime was introduced on January 13, 2012 by the Securities Exchange Board of India (“SEBI”) vide Circular No. CIR/IMD/FII&C/3/2012 and the RBI vide A.P. (DIR Series) Circular No. 66, which permitted qualified foreign investors to directly invest into listed equity

of Indian entities, subject to certain conditions. The New FDI Policy has also included within its folds this new regime .The following are inter alia the key features of the new QFI regime2:

The investment by QFIs in a company is subject to an individual investment limit of 5% and an aggregate investment limit of 10%. These limits are to be reckoned over and above the FII and NRI portfolio investment limits, however, the investment continues to remain subject to the sectorial caps prescribed by the RBI and the DIPP.

RBI would grant general permission to QFIs for investment under Portfolio Investment Scheme (PIS) route similar to FIIs.

The investment by QFI is subject to such QFI meeting the ‘know your client’ (“KYC”) requirements prescribed by SEBI. For the purposes of KYC, the ultimate beneficiary would be looked at and the responsibility of obtaining the KYC information and ensuring that the QFI complies with the prescribed norms and regulations has been imposed on the depository participant.

  QFIs shall be allowed to invest through SEBI registered Qualified Depository Participant (DP). A QFI shall open only one demat account and a trading account with any of the qualified DP. The QFI shall make purchase and sale of equities through that DP only.

DP shall ensure that QFIs meet all KYC and other regulatory requirements, as per the relevant regulations issued by SEBI from time to time.  QFIs shall remit money through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category - I bank. Upon receipt of instructions from QFI, DP shall carry out the transactions (purchase/sale of equity).

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http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india2-jan-19-2012.pdf

Background

In 2011, the Government of India (‘GOI’) announced its intention to widen the

class of foreign investors investing in Indian financial markets. The Indian

2 http://pib.nic.in/newsite/erelease.aspx?relid=79306

Finance Minister in his Budget speech then, announced that foreign investors

would be allowed to invest in domestic Mutual Funds (‘MFs’) schemes.

Accordingly, the Securities and Exchange Board of India (‘SEBI’) and the

Reserve Bank of India (‘RBI’) issued Circulars on 9 August 2011 allowing

Qualified Foreign Investors (“QFIs”) complying with the Know Your Customer

(‘KYC’) norms to invest in equity and debt schemes of domestic MFs.

On 1 January 2012, the GOI issued a press note stating that QFIs will now be

allowed to invest in the equity shares of Indian companies. Both the market and

banking regulators have issued detailed Circulars on 13 January 2012

operationalizing the Scheme for investment by QFIs in Equity Shares.

In the following paragraphs, we highlight the key features of the regulations

allowing QFIs to directly invest in Indian equity shares.

Investment Restrictions and Limits

QFIs can transact in Indian equity shares only on the basis of taking and giving

delivery of shares purchased or sold

QFIs are not permitted to issue offshore derivatives instruments/ participatory

notes

The total shareholding by an individual QFI shall not exceed five percent of

paid up equity capital of the company at any point of time. This investment limit

shall be apply to each class of equity shares

The aggregate shareholding of all QFIs shall not exceed ten percent of paid

up equity capital of the company at any point of time, in respect of each class of

equity shares

The limits are over and above the FII and NRI investment ceilings prescribed

under the Portfolio Investment Scheme. However, where composite sectoral

caps are prescribed under the FDI policy, the limits for QFI investments shall be

within such overall limits

In case the aggregate shareholding of the QFIs exceeds the limit of ten percent

for whatsoever reason, the QFI due to whom the limit is breached shall

mandatorily divest excess holdings within three working days of such breach

being notified by depositories to the DP.

Process Flow for Purchase of Equity Shares

Step 1 QFI places a purchase order with the DP mentioning the name of

the company and ISIN, number of equity shares, name of the stock

broker and transfers the foreign inward remittance from designated

overseas bank account to single rupee bank account of the DP in

any permitted currency (foreign convertible)

Step 2 DP forwards the purchase order and remits money to the SEBI

registered stock broker

Step 3 If QFI is unable to purchase equity shares within five working days

of inward remittance (including the date of receipt of foreign inward

remittance into single rupee bank account), DP immediately returns

the money to the designated overseas bank account of QFI

Step 4 DP ensures credit of equity shares purchased in QFI’s demat

account on the pay-out-date.

See the flow chart available on http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india2-jan-19-2012.pdf (on page 5 & 6) for better understanding.

QFIs Responsibilities and Obligations

The QFI in order to invest directly in the Indian equity market shall ensure

compliance of the SEBI and RBI Circulars / guidelines. Following is the brief

summary of QFIs responsibilities and obligations in this regard.

Account Opening

QFIs who meet prescribed KYC requirements can invest in equity shares

listed on the recognized stock exchanges and in equity shares offered to

public in India

QFIs to comply with all the requirements as per PML Act, rules and

regulations, FATF standards and SEBI circulars issued in this regard, from

time to time on an ongoing basis

QFI shall not issue offshore derivatives instruments / participatory notes

QFI shall, in relation to its activities as QFI, at all the times, subject

themselves to the extant Indian laws, rules, regulations, circulars etc., from

time to time

Transactions

A QFI can open only one demat account with any one of the DPs and shall

make purchase and sale of equity shares through that DP only

A QFI can open trading accounts with one or more SEBI registered stock

brokers

The transactions of QFIs, for all purposes, shall be treated at par with that of

Indian non institutional investors with regard to margins, voting rights, public

issues etc

Reporting

The QFI shall, as and when required by the Government, SEBI or any other

regulatory agency in India, submit to that agency, as the case may be, any

information, record or documents in relation to its activities as QFI

QFI to notify information of any penalty, pending litigations or proceedings,

findings of inspections or investigations for which action may have been

taken or is in the process of being taken by an overseas regulator against

QFI forthwith, to the attention of SEBI, depositories and stock exchanges

Income-tax

Each QFI shall obtain a separate and distinct PAN.

Particulars FII QFIMutual Fund Schemes

Equity Shares

Eligible Investors - Institutional Investors viz asset management company, investment manager, mutual fund, pension fund etc.

- Foreign individuals (other than NRIs) - subject to minimum net worth criteria of USD 50 million

Only QFIs from jurisdictions which are FATF compliant and with which SEBI has signed MOUs under the IOSCO framework will be eligible to invest (other than FII, subaccount, FVCI, NRI)

Only QFIs from jurisdictions which are FATF compliant and with which SEBI has signed MOUs under the IOSCO framework will be eligible to invest (other than FII, sub-account, FVCI, NRI)

SEBI Registration Required Not required Not requiredType of securities / investment

-Securities in primary and secondary markets including shares, debentures and warrants

Equity and debt schemes of Mutual Funds

- Equity shares listed on the recognized stock exchanges

- Equity shares offered to public

-Units of domestic Mutual Fund’s schemes, derivates traded on recognised stock exchange etc.

in India

Individual Investment Limits

- Investment in equity shares by FII investing on his own account – 10 percent. -Investment in equity shares by FII investing on behalf of each subaccount– 10 percent. - Investment by each sub-account of foreign corporate / individuals – 5 percent

5 percent of paid up capital of Indian Company

Aggregate Investment Limits

Aggregate ceiling for all FIIs / subaccounts of all FIIs – 24 percent; can be increased up to sectoral cap pursuant to passing of specific resolutions

-Equity schemes – aggregate investment by QFIs under direct and indirect route restricted to USD 10 billion.

- Debt schemes in infrastructure – overall ceiling of USD 3 billion within existing ceiling of USD 25 billion for FII investment in corporate bonds

10 percent of paid up capital of Indian Company

Issue of offshore derivatives instruments/participatory notes

Permitted Not Permitted Not Permitted

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In a circular issued by the finance ministry on May 29, the government allowed QFIs to open bank accounts in India.

“It has now been decided to allow QFIs to open individual non-interest bearing rupee accounts with Authorised Dealers banks in India for receiving funds and making payment for transactions in securities they are eligible to invest,” said the circular.

However the RBI is yet to issue a direction to banks. “These guidelines under FEMA, 1999 are being finalised in consultation with the government and Sebi and will be issued in due course,” said the RBI in an e-mail response to The Indian Express.

http://www.financialexpress.com/news/wooing-qfis-all-right-but-hurdles-remain/970410/2

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Name of prevalent QFI’s operating in India:

The government's efforts to attract investments from Qualified Institutional Investors have started yielding results, albeit slowly, with one QFI opening an account to invest in the markets here.

"First account under QFI has been opened," said Bombay Stock Exchange (BSE) Interim CEO Ashish Kumar Chauhan at an event organised by Assocham here.

He, however, did not identify the QFI.

http://www.businessworld.in/businessworld/businessworld/content/First-Qualified-Institutional-Investor-Opens-Account-BSE.html