SEBI INTERMEDIARIES - FOREIGN PORTFOLIO INVESTORS

[Mr. M. GOVINDARAJAN]

Foreign Portfolio Manager

‘Foreign portfolio investor’ (‘FPI’ for short) means a person who satisfies the eligibility criteria prescribed under regulation 4 and has been registered under these regulations, which shall be deemed to be an intermediary in terms of the provisions of the Act.

Designated Depository Participant

The ‘Depository Participant’ is governed by Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018.   Usually an intermediary is to get registration of certificate from Securities and Exchange Board of India (‘Board’ for reference).  In respect of FPI the designated Depository Participant is issuing certificate of registration on behalf of the Board.

Approval of a person as Designated Depository Participant

An application for approval to act as designated depository participant (‘DDP’ for short) shall be made to the Board through the depository in which the applicant is a participant.  The application fee payable is Rs.10,000/- to the Board. The depository shall forward the application to the Board within 30 days from the date of receipt by the depository, along with its recommendations and certifying that the participant complies with the eligibility criteria as provided for in these regulations.  The DDP shall pay approval fee of Rs.5 lakhs to the Board. 

After considering an application, the Board may grant approval to the applicant, if it is satisfied that the applicant is eligible and fulfills the requirements as specified in these regulations including payment of fees.   The Board shall dispose of the application for grant of approval within one month after receipt of application by the Board or, after the information called for has been furnished, whichever is later.

Rejection

If an application for grant of an approval does not satisfy the requirements specified in these regulations, the Board may reject the application. The decision to reject the application shall be communicated by the Board to the applicant in writing stating therein the grounds on which the application has been rejected.  The applicant may, within a period of 30 days from the date of receipt of communication apply to the Board for reconsideration of its decision.  The Board shall, as soon as possible, in the light of the submissions made in the application for reconsideration made and after giving a reasonable opportunity of being heard, convey its decision in writing to the applicant.

Validity of approval

The validity of approval is permanent unless the Board suspended or withdrew the same or surrendered by the DDP.

Categories of FPIs

There are three categories of FPIs as detailed below-

• ‘Category  I - FPI’ which shall include Government and Government related investors such as central banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies;

• ‘Category II - FPI’ which shall include-

• appropriately regulated broad based funds such as mutual funds, investment trusts, insurance/reinsurance companies;
• appropriately regulated persons such as banks, asset management companies, investment managers/ advisors, portfolio managers, broker dealers and swap dealers
• broad based funds that are not appropriately regulated but whose investment manager is appropriately regulated;
• university funds and pension funds; and
• university related endowments already registered with the Board as FPIs or sub-accounts.

• ‘Category III - FPI’ which shall include all others not eligible under Category I and II FPIs such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Eligibility criteria

The applicant shall satisfy the following conditions to obtain a certificate as FPI-

• the applicant is a person not resident in India;
• the applicant being a bank, is a resident of a country whose central bank is a member of Bank for International Settlements;
• the applicant is not resident in a country identified in the public statement of Financial Action Task Force;
• the applicant is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business;
• the applicant is authorized by its Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients;
• the applicant has sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity;
• the grant of certificate to the applicant is in the interest of the development of the securities market;
•  the applicant is a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008; and
• any other criteria specified by the Board from time to time.

Fee

FPI belonging to Category I shall be exempted from the payment of registration fees.   Where many FPIs have common beneficial owner(s), only one FPI shall be exempt from payment of registration fee under Category I and the other FPIs shall pay registration fees as applicable to Category II, except where the beneficial owner is an international/multilateral agency such as World Bank and other institutions, established outside India for providing aid, which have been granted privileges and immunities from payment of tax and duties by the Central Government.  FPI belonging to Category II and III shall pay registration fees, before commencement of its activity.   FPI belonging to Category II and III shall pay registration fees of US $ 3000 and US $300, respectively or any other amount specified by the Board from time to time, for every block of three years, till the validity of its registration, by way of electronic transfer in the designated bank account of the Board.

Procedure for grant of certificate

An applicant seeking registration as a FPI shall engage a DDP to avail its services for obtaining a certificate of registration as FPI.

The following is the procedure involved in grant of certificate-

• An application for the grant of certificate as FPI shall be made to the designated depository participant in Form A along with the requisite fee.
• The Board or the designated depository participant may require the applicant to furnish such further information or clarification as may be considered necessary to grant certificate of registration as a FPI.
• The applicant or his authorized representative shall, if so required by the Board or designated depository participant, appear before them for personal representation in connection with the grant of a certificate.
• The DDP may grant certificate of registration as prescribed in Form B to an applicant if it is satisfied that the applicant is eligible and fulfils the requirements as specified in these regulations.
• The DDP shall endeavor to dispose of the application for grant of certificate of registration as soon as possible but not later than 30 days after receipt of application by the designated depository participant or, after the information called for has been furnished, whichever is later.
• Upon grant of certificate of registration to the FPI, the DDP shall forthwith collect the fees from FPI on behalf of the Board and shall remit fees to the Board.
• If an applicant seeking registration as a FPI has any grievance with respect to its application or if the DDP has any question in respect of interpretation of any provision of this regulation, it may approach the Board for appropriate instructions.

Rejection of application

If the application for grant of certificate of registration to act as a FPI, which is not complete in all respects or is false or misleading in any material particular shall be deemed to be deficient and liable to be rejected by the designated depository participant.  Before rejecting any such application, the applicant shall be given a reasonable opportunity to remove the deficiency, within the time as specified by the designated depository participant.

The decision to reject the application shall be communicated by the designated depository participant to the applicant in writing stating therein the grounds on which the application has been rejected.  The applicant, who is aggrieved by the decision of the designated depository participant may, within a period of 30 days from the date of receipt of communication apply to the Board for reconsideration of the decision of the designated depository participant.  The Board shall, as soon as possible, in the light of the submissions made in the application for reconsideration made and after giving a reasonable opportunity of being heard, convey its decision in writing to the applicant.

Validity of the certificate

The certificate granted to the FPI is permanent unless the certificate is suspended or cancelled by the Board or surrendered by the FPI.

Surrender of certificate

If the FPI wants to give up his activity he may surrender the certificate to the designated depository participant who will accept the same after getting the approval of the Board.  The DDP may impose such conditions as may be specified by the Board on the FPI for the compliance of the same.

Investment restrictions

No FPI shall make any investments in securities in India without complying with the provisions of Chapter IV.  A FPI shall invest only in the following securities-

• Shares, debentures and warrants of companies, listed or to be listed on a recognized stock exchange in India, through primary and secondary markets;
• Units of schemes floated by domestic mutual funds, whether listed on a recognized stock exchange or not;
• Units of schemes floated by a collective investment scheme;
• Derivatives traded on a recognized stock exchange;
• Treasury bills and 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 the Reserve Bank of India from time to time;
• Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the infrastructure sector, where ‘infrastructure’ is defined in terms of the extant External Commercial Borrowings  guidelines;
• Non-convertible debentures or bonds issued by Non-Banking Financial Companies categorized as ‘Infrastructure Finance Companies’ by the Reserve Bank of India;
• Rupee denominated bonds or units issued by infrastructure debt funds;
• Indian depository receipts; 
• Unlisted non-convertible debentures/bonds issued by an Indian company subject to the guidelines issued by the Ministry of Corporate Affairs, Government of India from time to time;
• Securitized debt instruments, including,-

•  any certificate or instrument issued by a special purpose vehicle set up for securitization of asset/s with banks, financial institutions or non-banking financial institutions as originators; and
• any certificate or instrument issued and listed in terms of the Securities and Exchange Board of India (Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008; and

• Such other instruments specified by the Board from time to time.

In respect of investments in the secondary market, the following additional conditions shall apply-

1. A FPI shall transact in the securities in India only on the basis of taking and giving delivery of securities purchased or sold;
2. Nothing contained in clause (a) shall apply to-

• any transactions in derivatives on a recognized stock exchange;
• short selling transactions in accordance with the framework specified by the Board;
• any transaction in securities pursuant to an agreement entered into with the merchant banker in the process of market making or subscribing to unsubscribed portion of the issue;
• any other transaction specified by the Board.

The transaction of business in securities by a FPI shall be only through stock brokers registered by the Board.   No transaction on the stock exchange shall be carried forward.  A FPI shall hold, deliver or cause to be delivered securities only in dematerialized form. 

No FPI may issue, subscribe to or otherwise deal in offshore derivative instruments, directly or indirectly, unless the prescribed conditions are satisfied FPI shall fully disclose to the Board any information concerning the terms of and parties to off-shore derivative instruments such as participatory notes, equity linked notes or any other such instruments  entered into by it relating to any securities listed or proposed to be listed in any stock exchange in India, as and when and in such form as the Board may specify. 

A FPI shall collect the regulatory fee of US $ 1000 or any other amount, as may be specified by the Board from time to time, from every subscriber of offshore derivative instrument issued by it and deposit the same with the Board by way of electronic transfer in the designated bank account of the Board.   The regulatory fee shall be deposited once every 3 years.

Obligations and responsibilities of FPI

The following are the obligations and responsibilities of the FPI under these regulations-

• The FPI shall comply with the provisions of these regulations, as far as they may apply, circulars issued there under and any other terms and conditions specified by the Board from time to time
• A  FPI shall, at all times, abide by the code of conduct as specified in Third Schedule.
• A FPI or a global custodian, who is acting on behalf of the FPI, shall enter into an agreement with the designated depository participant engaged by it to act as a custodian of securities, before making any investment under these regulations.
• A FPI shall appoint a branch of a bank authorized by the Reserve Bank of India for opening of foreign currency denominated account and special non-resident rupee account before making any investments in India.
• Every FPI shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the designated depository participant or the Board or the Central Government.
• Every FPI shall keep or maintain the books of accounts, records and documents.
• The above said records shall be kept for a minimum period of 5 years.

Obligations and responsibilities of DDP

The following are the obligations and responsibilities of the FPI under these regulations-

• The DDP shall comply with the provisions of these regulations, as far as they may apply, circulars issued there under and any other terms and conditions specified by the Board from time to time
• Every DDP shall keep or maintain, as the case may be, the relevant true and fair records, books of accounts, and documents including the records relating to registration of foreign portfolio investors.
• Every DDP shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines and instructions issued by the Board or the Central Government.
• Every DDP shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or documents in relation to activities of foreign portfolio investor as the Board or as the Reserve Bank of India may require.

Inspection

The Board may suo motu or upon receipt of information or complaint appoint one or more persons as inspecting authority to undertake inspection of the books of account, records and documents relating to a designated depository participant.  Before undertaking an inspection the Board shall give not less than 10 days notice to the designated depository participants.

The DDP shall allow the inspecting officer to have reasonable access to the premises occupied by such designated depository participant or by any other person on its behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the designated depository participants or such other person and also provide copies of documents or other materials which in the opinion of the inspecting officer are relevant for the purposes of the inspection.

The inspecting officer shall, as soon as possible, on completion of the inspection or investigation as the case may be, submit a report to the Board. 

The Board shall after consideration of inspection report take such action as the Board may deem fit and appropriate including action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

Appointment of Auditor

The Board shall have the power to appoint an auditor to inspect or investigate into the books of account, records, documents, infrastructures, systems and procedures or affairs of the applicant or the DDP.   The Board shall be entitled to recover from the DDPs or applicant, as the case may be, such expenses including fees paid to the auditors as may be incurred by it for the purposes of inspecting or investigating the books of account, records, documents, infrastructures, systems and procedures or affairs of the designated depository participants or applicant, as the case may be.

Liability in case of default

A FPI, DDP or any other person who contravenes any of the provisions of these regulations shall be liable for action under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 and/or the relevant provisions of the Act or the Depositories Act, 1996.