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Removal of broad-based criteria will help ease FPI registration process, say legal experts

Updated : August 22, 2019 09:37 AM IST

Market regulator Securities and Exchange Board of India (Sebi) has eased the regulatory and compliance framework for foreign portfolio investors (FPI). Apart from doing away with broad-based eligibility criteria for institutional FPIs, under the new framework, foreign portfolio investors will now be classified into two categories instead of the earlier three.

Divaspati Singh, partner, Khaitan & Co and Shruti Rajan, partner, Cyril Amarchand Mangaldas spoke to CNBC-TV18 about the developments and their impact on the markets.

Rajan said that the task that Sebi has taken on through the changes is significant. “In principle, what these regulations effectively meant is that you have to have 20 investors with nobody holding more than 49 percent and that is what the press release looks to change.”

Singh said that it is helpful to see Sebi remove the broad-based criteria of FPIs requiring minimum 20 investors with nobody holding more than 49 percent because a large chunk of the time in the registration process went in ascertaining whether an entity met the broad-based criteria.

“This would help because it would significantly reduce the entire timeframe for registering an FPI since they have removed the broad-based criteria and a lot of entities which were regulated would have to register as Category III FPIs merely because they could not meet the 20 investors and no investor holding more than 49 percent criteria and now that this is removed all those entities would come under the new categorisation, maybe Category I.”

Explaining the broad-based criteria in detail, Singh said: “It is any entity which wishes to fulfill the broad-based test has to meet with two-criteria. The first criteria is there should be at least 20 investor and the second criteria is that no individual or non-broad-based investor should hold more than 49 percent in interest of that FPI vehicle and both these criteria combined to meet the broad-based test. Both these have been removed.”

Sebi also said they will rationalise an issuance and subscription requirements for Offshore Derivative Instruments (ODIs). Explaining the move, Singh said: “The intention of the regulators had always been that they wanted to put ODIs at par with the direct investment regime. They did not want people to take arbitrage between direct investments vis-à-vis the ODI.”

Now, since the FPI regulations are being streamlined and certain issues are being relaxed, maybe the same relaxations will also apply to ODI framework as well, he added.
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