In a recent move aimed at protecting India’s financial markets, the Securities and Exchange Board of India (SEBI) has released new norms designed to simplify the compliance and operational requirements for Foreign Portfolio Investors (FPIs). These measures stem from serious concerns over the outflow of FPI funds, with share sales in July and August of 2019 exceeding Rs 22,000 crore. This was largely due to FPIs withdrawing their investments from Indian equities after higher tax surcharges were imposed on the super-rich in the 2019 Budget. SEBI’s redrafted FPI regulations, based on recommendations from the H R Khan committee, are expected to make the regulatory framework more investor-friendly.
Major Changes in the FPI Regulations
A significant change in the FPI regulations is SEBI’s decision to eliminate the broad-based criteria. Previously, it was required that every FPI should have at least 20 investors. This requirement has now been scrapped, further simplifying the Know-Your-Customer (KYC) document requirements for overseas investors.
Central Banks and FPI Registration
SEBI has also allowed the central banks of countries that are not members of the Bank for International Settlement (BIS) to register as FPIs in India. According to SEBI, these entities are considered as relatively long term, low-risk investors since they are directly or indirectly managed by the government.
Off-Market Transfer of Securities
Furthermore, FPIs can now transfer securities off-market if they are unlisted or illiquid, to either a domestic or foreign investor. In addition, offshore funds floated by Indian asset management companies are now permitted to register as FPIs and invest in the Indian market.
Re-categorization of FPIs
In another major regulatory adjustment, SEBI has decided to re-categorize FPIs into two categories – Categories I and II – instead of the current three categories. This means the previous concept of Category-III FPIs has been removed.
Key Facts on FPI Outflow
| Year | FPI Outflow (in Rs crore) |
|---|---|
| 2019 (July-August) | 22,000 |
Amendments in Insider Trading Regulations
Aside from changes in FPI regulations, SEBI has also amended the Prohibition of Insider Trading regulations, introducing a clause to reward those who blow the whistle on inside trading occurrences.
