Foreign Portfolio Investments Operational Framework & Sales Strategy September 2014
Agenda 1 The FPI Regime 2 Operational Flows 3 Marketing Strategy 2
Foreign Investment Routes Foreign Investment Routes Venture Fund FDI NRI/PIO FII/SA QFI FPI In Jan 2014 SEBI has merged the FII/Sub-Account/QFI into a single Regulations FOREIGN PORTFOLIO INVESTORS (FPI) Within FPI there are three internal categories classified as I, II, III NRI (Non-Resident Indians) continue to be a separate category (via RBI) 3
Eligibility Criteria The Applicant: IsapersonnotresidentinIndia IsaresidentofacountrywhichisasignatorytoSEBIMoU/IOSCO smmou Is resident of a country meeting FATF requirements If a Bank, should be resident of a country whose Central Bank is a member of the Bank for International Settlements IsnotaNonResidentIndian(NRI) Is legally permitted to invest in Securities outside his country IsauthorizedbyitsMoA&AoA(orequivalentdocument) Has sufficient experience, good track record, is professionally competent, financially sound, generally good reputation of fairness and integrity Does not have a opaque structure (protected / segregated cell company or similar where ultimate beneficial owners are ring fenced from each another) 4
FPI Categories Government and Government related foreign investors such as Foreign Central Banks, Governmental Agencies, Sovereign Wealth Funds International/ Multilateral Organizations/ Agencies I II Regulated broad based funds such as Mutual Funds, Investment Trusts, Insurance Regulated entities such as Banks, Asset Management Companies, Investment Managers/Advisors, Portfolio Managers etc. Broad based funds whose investment manager is appropriately regulated University Funds and Pension Funds III All other eligible foreign investors not eligible under Category I and II such as Endowments, Charitable Societies/Trust, Foundations Corporate Bodies Trusts Individuals Family Offices Broad Based Fund implies having at least 20 investors, with no investor holding > 49% benefits In case of an Institutional Investor holding more than 49%, then this investor must itself be a Broad Based Fund For ascertaining number of investors, both Direct and underlying Investors to be considered Only investors of entities set up for the sole purpose of pooling funds and making investments shall be considered for the purpose of determining underlying investors 5
FPI Regime Features Items Description SEBI Registration, Fees Mandatory; Due diligence and registration will be done by Custodian (DDP). USD 1000 per year fee for Cat II, USD 100 fee for Cat III Custody A/c Mandatory PAN Number / CA Mandatory to obtainpan Card, file tax returns in India Bank A/c Foreign currency + INR account allowed Demat One per Depository allowed Brokers Multiple trading members allowed, order placement directly with Brokers Investments Types Listed securities only permitted; Infra bonds allowed in unlisted also Equity, Mutual Funds Debt (Government, Corporate) Equity, Currency and Interest Rate Derivatives InvestmentLimits Investment in the Equity Shares of a Company by a Single FPI or a Group of FPIs shall be < 10% of the Issued Capital of the Company. Government Debt:USD 31 Bn, Corporate Debt USD 50 Bn Separate position limitsin the Derivatives Taxation Standard tax rates for all categories, no TDS ODI/P-notes Categories I and II FPIs may issue, subscribe to or otherwise deal in ODIs 6
FPI Regime Features: Investment Types Items Description Equity Shares, Debentures and Warrants, listed or to be listed (both Primary / Secondary) Units of domestic Mutual Fund Schemes, whether listed or not Units of schemes floated by a Collective Investment Scheme Derivatives traded on a recognized Stock Exchange Indian Depository Receipts (IDRs) Other instruments as permitted from time to time Debt Dated Government Securities Commercial Papers issued by an Indian Company Rupee denominated Credit Enhanced Bonds Security Receipts issued by Asset Reconstruction Companies Perpetual Debt instruments and debt capital instruments, as specified by RBI from time to time Non Convertible Debentures / Bonds issued by an Indian Company in the Infrastructure sector Non Convertible Debentures / Bonds issued by NBFCs categorized as Infrastructure Finance Company by RBI Rupee denominated bonds or units issued by Infrastructure Debt Funds Such other instruments specified by SEBI from time to time Derivatives Equity Interest Rate Currency 7
FPI vs. QFI Items QFI Policy FPI Policy SEBI Registration & Fees Eligible Countries Was not Required, no Fee Required and Fee to be paid Were about 45 Now close to 110 countries allowed NRIs Investments Limits Bank A/c 5% per QFI limit for Equity Capital Debt limits same in both regime Were allowed Not allowed directly, only RBI route valid now 10% per FPI limit in Equity now Only INR bank account allowed Fx account also permitted Order Management and Clearing Type ofinvestments Must giveorders to QDP, who had to then route it to brokers. Clearing was done by QDP who could be a Custodian / DP/Broker Taxation Was verycumbersome, TDS was to be deducted Equity, MF,Government Debt, Corporate Debt Can placeorders directly with brokers. Clearing will be done by Custodian only now. No TDS deduction Even Derivatives allowedin addition (Equity, Interest, Currency Derivatives) 8
FPI Regime: NRI Investors WHAT IS NOT ALLOWED NRI can not directly invest via FPI route (must come via RBI in that case) Direct NRI/PIO An NRI owned company (majority owned, > 50%) will not be permitted to invest (combined total of all NRI beneficiaries in that entity must not be > 50%) Currently an entity having majority NRI ownership will not be able to invest into secondary markets via either SEBI (FPI) or RBI (PIS) route. PIOs are considered at par with NRIs. SEBI FPI Route RBI PIS Route RBI PIS Mechanism Under this mechanism, an NRI can: invest directly via a single broker, and let broker manage the funds / securities settlement invest directly via one / multiple brokers and take centralized custody services for clearing and settlement invest into a PMS scheme 9
FPI Regime: NRI Investors cont d. WHAT IS ALLOWED NRI can invest into a Fund Structure (and that Fund will get FPI registration) wherein the fund has been setup as a pooled vehicle. NRIs are also permitted to act / register as Investment Managers (however the IM can not invest proprietary money in this case) NRI owned entities are permitted to invest via FDI route which may require specific permissions unless covered under automatic approval criteria. Pooled Vehicle / Fund NRI PIO Oth SEBI FPI Route 10
Operational Flows
I: Account Opening Flow Start PAN 14 Days Overseas Bank A/c KYC / FPI Registration 3 Days Remittance Funding Bank A/c CP Code (EQ) 5 Days DP A/c CP Code (Der) 3 Days Trading A/c 2 Days Orders Custodian would facilitate the entire account opening process Expected timelines for entire setup and go live are about 1 month 12
II: Know Your Client Individuals Proof of Identity (Passport mandatory) Proof of Address Bank Proof Bank Letter PAN Non-Individuals Constitutive Documents (MoA, Trust Deed, Partnership Deed) Certificate of Incorporation Regulatory Affiliation details Proof of Address Bank Account Details Bank Letter stating satisfactory relationship (Cat III only). Board Resolution stating that entity is allowed to invest Shareholding details and Ultimate Beneficiaries # Details Financials Senior Management Credentials / Photo Authorized Signatories Details PAN This is an indicative list. Exact KYC details to be consulted with Custodian at the time of account opening # Natural person or persons who ultimately own, control or influence a client and / or persons on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement (>25% incase of Companies & > 15% in case of other entities) For PAN card application: In case of non-individual entities, the certificate of incorporate must be counsularizedfrom Indian Embassy. Rest all supporting documents are to be notarized / attested by Banks 13
III: Order Management & Clearing Broker 1 Foreign Portfolio Investor. Broker 2 Broker 3 Broker 4 Multi-Broker Setting MF Investments Exchanges Custodian Equity/Debt/Derivatives Clearing & Settlement Bank A/c Demat A/c. IPO / Buy-back / Primary Debt AMC/ Company Equity is settled on T+2 basis MF Redemptions are settled on T+1 basis Government Debt is settled T+1 basis Corporate Debt is settled on T+0 / T+1 basis FPI can make use of Stock Lending and Borrowing segment to manage any short sales. 14
IV: Derivatives Clearing COLLATERALS Cash Corporate Bonds Government Securities AAA Sovereign Securities How to Handle G-Sec Collateral Can be purchased via the primary dealers / Banks (via CSGL account) Convert into demat account of the FPI Place as collateral with the PCM/DDP Exchange Margins Cat I and II are non-marginable CPs Cat III is marginable Real-time Clearing Will help Algo/ High Frequency Trading clients Volumes and TM Base capital can be de-linked this way 15
V: Roles and Responsibilities Item Broker Custodian Client CA Bank Advisor SEBI Registration DP A/c KYC Bank A/c Exchange CP Trade Life-cycle Advisory Client Relationship 15CA-CB/Tax Reg Reporting RBI Reporting Client Reporting Compliance 16
What Will Attract Investors (and thus their Investments also!!)
Investment Destination The sheer size of the market is staggering. Out of 1.2 billion people, more than 250 million are considered middle class. This is more than 10 times the size of the U.S. middle class at the start of the Industrial Revolution. we find a lot of businesses that we consider are trading at trough earnings and on trough multiples India ranked FIRST in AT KEARNEY Global Services Location Index and Global Retail Development Index GDP growth Momentum will continue over the next 10 years Infrastructure push is the centre of focus now Progressive Policies regime in place now Defense and Insurance opened up further in Jul 14 Political stability will auger well for next phase of growth Railway corridors, Industrial corridors, Highways, Electricity, Sanitation, Urban Infra, Civil Aviation to drive the country to next level 18
Marketing Pitch : Macro Items Description Investor Segments Cat IIIis given a big lease of life as compared to QFI regime so highly likely to succeed this time. Special focus groups would be large family offices, hedge funds, non-broad based funds Marketing Reach Marketingreach for domestic entities needs to be enhanced. Regulators / Market Institutions / Associations need to market the product jointly. -Direct reach (own offices, partners in foreign jurisdictions) - Indirect (webcast, online access, regulatory update events and mailers) Investor Perception Foreign investors specially Cat III which may comprise of smaller entities, individuals generally will view India as an expensive and difficult market thus will require handholding! Market the Strengths at Nation Level - Strong Regulations with highemphasis on KYC & Risk Management Both at Intermediaries & Product Level - Best in class capitalmarket infrastructure (IT Systems, Communication back-bone, Access points - DMA, Algo in place, co-locations etc) - Best in class clearing and settlement (T1 for ages now, settlement guarantee) - Safety and Security (demat in own account, remittances, custodian role) 19
Marketing Pitch : Micro Global Partners / Reach IT / Systems Capability (Algo/HFT) Pedigree in Domestic Markets Trading Member Institutional Segment Services Vs. Retail Segment Services Execution Costs Depth in Research / Advisory 20
Thank You Custody Services ILFS House, 14, Raheja Vihar, Chandivali, Mumbai 400 072 INDIA T: (91) 022 42493000 M: (91) 9920492241 9819216228 E: Custody.Group@issl.co.in W: www.issl.co.in