from India Tax & Regulatory Services Amendments to Foreign Portfolio Investors Regulations to incorporate recent changes on eligibility criteria, clubbing of investment limits and others January 7, 2019 In brief In the context of Foreign Portfolio Investors (FPIs), the Securities and Exchange Board of India (SEBI) had earlier issued circulars 1 on: Know Your Client (KYC) requirements/ eligibility conditions for FPIs; and Clubbing of investment limits by FPIs. Pursuant thereto, amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations) were notified by SEBI vide notification dated 31 December 2018 in SEBI (Foreign Portfolio Investors) (Third Amendment) Regulations, 2018 2 (FPI Third Amendment Regulations 2018). Additionally, certain other changes were incorporated in the FPI Regulations, which have been tabulated below. In detail The following table contains the key changes announced in the FPI Third Amendment Regulations 2018 along with a comparison to the circulars issued by SEBI/ current provisions: FPI Third Amendment 1 Definition of control In the context of identification of ultimate beneficial owner, SEBI circulars dated 10 April, 2018 and 21 September, 2018 referred to control as per Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. The term control as referred to in Rule 9 of the Prevention of Moneylaundering (Maintenance of Records) Rules, 2005 and the Explanation in the 1 Circular SEBI/HO/IMD/FPIC/CIR/P/2018/66 and CIR/IMD/FPIC/CIR/P/2018/64 dated 10 April, 2018 Circular CIR/IMD/FPIC/CIR/P/2018/131 and CIR/IMD/FPIC/CIR/P/2018/132 dated 21 September, 2018 Circular SEBI/HO/IMD/FPIC/CIR/P/2018/150 dated 13 December, 2018 2 Notification SEBI/LAD-NRO/GN/2018/58 dated 31 December, 2018 www.pwc.in
2 Definition of Investment Manager (IM) 3 Eligibility criteria for FPI Non-Resident Indians (NRIs)/ Overseas Citizens of India (OCIs)/ Resident Indians (RIs) In the SEBI circular dated 13 December, 2018, control was explained as follows: Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner. While the term IM was referred in the SEBI circular dated 13 December, 2018 the same was not explicitly defined. Vide its circular dated 10 April, 2018 the SEBI had restricted NRIs/ OCIs/ RIs to be a beneficial owner of the FPI. Thereafter, the eligibility conditions for NRIs/ OCIs/ RIs to invest in FPIs were revised and outlined in the SEBI circular dated 21 September, 2018 as follows: circular dated 13 December, 2018 is now defined in Regulation 2(1)(ca) of the FPI Regulations. The term IM is now defined in the Regulation 2(1)(ia) as follows: IM means an entity performing the role of investment management, investment advisory or any equivalent role, including trustees. Similar eligibility criteria as specified in the SEBI circular dated 21 September, 2018 for NRIs/ OCIs/ RIs have been inserted in the FPI Regulations vide Regulation 4(1)(ea). Additionally, in Regulation 4(1) (eb), the following criteria are inserted: Contributions by NRI/ OCI/ RI including contributions by an IM controlled by NRIs/ OCIs/ RIs should not exceed: (i) 25% of the FPIs corpus from a single NRI/ OCI/ RI; (ii) 50% of the FPIs corpus from aggregate of such investments by NRIs/ OCIs/ RIs. RI s contribution in global funds whose Indian exposure is less than 50% by way of remittances under Liberalised Remittance Scheme approved by the Reserve Bank of India. NRI/ OCI/ RI should not be in control of FPI. No restriction imposed on NRIs/ OCIs/ RIs to manage noninvesting FPIs or SEBI registered offshore funds provided any of the following conditions are satisfied: IM of the FPI is appropriately regulated in its home FPI and their underlying investors contributing 25% or more to the corpus of the FPI or identified on the basis of control, shall not be persons mentioned in the Sanctions List notified from time-to-time by the United Nations Security Council and shall not be from a jurisdiction which is identified in the public statement of the Financial Action Task Force as: i. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or ii. A jurisdiction that has not made sufficient progress in addressing the deficiencies or has 2 pwc
4 Timelines for compliance with the eligibility criteria 5 Definition of Person, NRI, OCI and Resident in India 6 Definition of government agency jurisdiction and registers itself with the SEBI as a noninvesting FPI; or IM is incorporated or set up under the Indian laws and appropriately registered with the SEBI; or Where such FPIs are offshore funds for which the SEBI has provided no-objection certificate under the Mutual Fund Regulations. The above restrictions will not apply to FPIs investing only in mutual funds in India. The timelines for compliance with the eligibility conditions were specified in the SEBI circular dated 21 September, 2018 as: Existing and new FPIs are required to satisfy the eligibility conditions within two years from the date of coming into force of the amended regulations or from the date of registration, whichever is later. In case of temporary breach, a time period of 90 days will be given to ensure compliance. As per SEBI circular dated 21 September, 2018 NRIs and OCIs had the same meaning as assigned to it under Regulation 2 of the Foreign Exchange Management (Transfer or issue of security by a Person Resident outside India) Regulations, 2017. not committed to an action plan developed with the Financial Action Task Force to address the deficiencies. Similar timelines have been specified in Regulation 4(2) wherein: Existing and new FPIs are required to satisfy the eligibility conditions within two years from the date of coming into force of the amended regulations or from the date of registration, whichever is later. Further, in case of noncompliance after two years/ three months, as applicable, no fresh purchases will be permitted and the existing holdings are to be disinvested within a period of 180 days. In case of a temporary breach, a period of 90 days will be given to ensure compliance with the eligibility conditions. In addition to the meaning of the terms NRIs and OCIs, the terms Person and Resident in India are aligned to the meaning as assigned to it under the Foreign Exchange Management Act, 1999. - In the Explanation to Regulation 5 (a) for the purpose of Category I FPI, government agency has been defined to mean an entity in which the Government of a foreign country holds more than 75% of ownership or control. PwC Page 3
7 Restrictions on issuance of offshore derivative instruments As per Regulation 22(1)(c) of the extant FPI Regulations, FPIs are not permitted to issue or transfer offshore derivative instruments to persons who are RIs or NRIs, and to entities beneficially owned by RIs or NRIs. Regulation 22(1)(c) is amended to restrict issuance/ transfer of offshore derivative instruments to persons who do not satisfy the eligibility criteria for FPI, as enumerated in Regulation 4 (including RIs and NRIs). 8 Information to SEBI and Designated Depository Participant (DDP) 9 Clubbing of investment limits 10 Monitoring investment concentration by FPIs Currently, FPIs have to inform any material change in the information previously furnished to the SEBI and DDP forthwith. As per the SEBI circular dated 13 December, 2018 the clubbing of investment limits for FPIs will be on the basis of common ownership of more than 50% or common control. No clubbing of investment limit of FPIs having common control in case of: i. FPIs that are appropriately regulated public retail funds; or ii. FPIs that are public retail funds majority owned by appropriately regulated public retail funds on look through basis; or iii. FPIs that are public retail funds and investment managers of such FPIs are appropriately regulated. Public retail funds mean: i. Mutual funds or unit trusts, which are open for subscription to retail investors and do not have specific investor type requirements, e.g., accredited investors, etc.; ii. Insurance companies where segregated portfolio with oneto-one correlation with a single investor is not maintained; and iii. Pension funds. As per Regulation 23(1)(c), FPIs now have to forthwith inform the SEBI and DDP of any material change in information (including direct or indirect change in its structure or ownership or control). Similar criteria for clubbing of investment limits are now included in Regulation 23(3) and newly inserted Regulation 23(3A). - As per newly inserted Regulation 23(4), in case of common ownership or control in public retail funds, the PwC Page 4
11 Meaning of Opaque structure extended to include bearer shares 12 Category I FPIs Registration Fees As per the SEBI circular dated 10 April, 2018 FPIs had to confirm that they do not maintain any outstanding bearer shares and will not issue bearer shares. The print was omitted in the SEBI circular dated 21 September, 2018. As per extant FPI Regulations, in case of common beneficial owners for Category I FPIs, one FPI shall be exempt from payment of registration fee and other FPIs are required to pay the registration fee as applicable to Category II. Indian Depositories shall maintain the following details of controlling entities and report to the SEBI on a periodic basis: i. Name ii. Address iii. iv. Nationality Passport number/ any other identification card issued by the Government. Restriction on issuance of bearer shares are incorporated in the FPI Regulations through amendment to Regulation 32, deals with Opaque Structures. Further, the FPI is required to submit an undertaking that it does not maintain any outstanding bearer shares and it would not issue bearer shares in future. The SEBI has now substituted common beneficial owners with direct/ indirect common ownership or control. The takeaways The changes to the FPI Regulations largely incorporate the eligibility criteria and clubbing of investment limits introduced by the SEBI circulars of 2018. Aligning the definition of the terms Person and Resident of India from the Income-tax Act, 1961 to FEMA should remove ambiguities and may assist in addressing issues in domiciling offshore funds in International Financial Services Centre in India. Let s talk For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor PwC Page 5
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