The Securities and Exchange Board (SEBI) has recently reviewed the regulations surrounding foreign portfolio investments in India. A report produced by a working group chaired by former RBI Deputy Governor HR Khan, highlights the importance of international investors in providing much needed capital to the Indian economy. The report underscores the need to offer these investors an uncomplicated and consistent investment experience while also increasing transparency in line with evolving economic regulations. The primary objectives of the work group were to consolidate, simplify, rationalise and liberalise the Foreign Portfolio Investment framework.
Key Recommendations by the Working Group
The group proposed several recommendations aimed at streamlining the regulations to encourage more foreign inflow into the Indian market. This includes the introduction of a fast-track on-boarding procedure for investors, as well as simplifying the registration process. Apart from categorising pension funds under Category I Foreign Portfolio Investors (FPIs) registration, the working group suggested removal of opaque structures and review of broad-based conditions for suitably regulated entities.
Proposed Changes in Investment Caps and Restrictions
A review of prohibited sectors for foreign investment was recommended, with a proposal for a more liberal investment cap for FPIs. The committee also suggested restrictions on Sovereign Wealth Funds (SWFs) investing in corporate debt securities, and permission for FPIs to engage in off-market transactions. They also advocated for the harmonisation of FPI and Alternative Investment Fund (AIF) regulations, as well as reconciling investment restrictions between FPI regulations and the Foreign Exchange Management Act (FEMA).
In terms of restrictions on FPI investments in mutual funds, the group has recommended further deliberation on whether such restrictions should be prompted. It is noted that FPIs are currently not permitted to invest in liquid and money market mutual fund schemes.
Categories of Foreign Portfolio Investors (FPIs) and Alternative Investment Fund (AIF)
Foreign Portfolio Investors can be categorised into three different risk categories, based on the type of investor and the risk associated.
| FPI Category | Description |
|---|---|
| Category I – Low Risk | Includes government entities, Foreign Central banks, Sovereign Wealth Funds, Multilateral Organizations etc. |
| Category II | Largely include regulated institutions, persons, broad-based funds, and university, pension and endowment funds. |
| Category III – High Risk | Includes all other FPIs not eligible to be included in the above two categories. |
Alternative Investment Funds (AIFs) are privately pooled investment funds not covered by any existing SEBI regulation nor under the direct control of any sectoral regulators in India such as IRDA, PFRDA, RBI. In India, AIFs are private funds that do not fall under the jurisdiction of any regulatory agency.
AIF Categories
AIFs are divided into three categories based on their investment strategies and leverage, including venture capital funds, real estate funds, and hedge funds.