From investment cap to pension funds, Sebi moots changes to FPI rules

Sectoral investment caps applicable to FDI should not be applicable to FPI, the panel has proposed
A Securities and Exchange Board of India (Sebi)-constituted committee has proposed wide-ranging changes to the foreign portfolio investment (FPI) regime, aimed at boosting capital flows into the country by improving ease to doing business, especially for large and well-regulated global institutions.

Liberalised investment caps, foreign direct investment (FDI)-like leeway, easy on-boarding, and permission to invest in unlisted companies ahead of their initial public offerings (IPOs) are among the 50-odd changes suggested by the panel chaired by former Reserve Bank of India (RBI) deputy governor HR Khan. The proposals are open for public comments.

“Flows of overseas funds, both through the FPI and FDI routes, have been significant with record inflows into capital markets in India in recent years. As a key source of capital to the Indian economy, it is important to ensure a harmonised and hassle-free investment experience for international investors and improve transparency as economic regulations evolve,” the committee said in its report released on Friday.

The Khan panel has recommended allowing FPIs to exceed their 10 per cent investment cap. “Given that FPIs do not exercise any control or influence, it is proposed that prohibition relating to foreign investments in certain sectors should be limited to FDI and not be extended to FPIs. However, such FPIs’ existing investments, including ADR and GDR, may not exceed 49 per cent,” the report says.

Also, sectoral investment caps applicable to FDI should not be applicable to FPI, the panel has proposed. It also said permission for FPIs to invest in units of real estate investment trusts (Reits), infrastructure investment trusts (InvITs), and alternative investment funds (AIFs) should be allowed through regulations. Currently, this is allowed only through a circular, which often leads to ambiguity. 

The panel has also proposed that sovereign wealth funds should be exempted from investment caps in corporate debt. FPIs can be allowed to invest in “to-be-listed” shares, it said, while deferring a decision on fully allowing FPI investments in unlisted companies, citing certain risks. The panel has prescribed several relaxations when it comes to reclassification of investment from FPI to FDI.

Another key proposal is to allow offshore funds floated by Indian mutual funds to invest in India only through the FPI route. The panel has also said participatory notes (p-notes) should be allowed to hedge both on a one-to-one basis or portfolio basis in derivatives listed in India.

As part of easing the registration process, the Khan panel has recommended fast-tracking on-boarding process, which includes know-your-client (KYC) formalities, for more set of investors such as public retail funds or those intending to invest in central or state government securities. 

The panel has also suggested that pension funds or schemes that provide retirement benefits should be classified as Category-I investors, who are subject to least stringent regulations. 

The panel has also said the broad-basing criteria can be relaxed for private banks or asset managers investing on behalf of their clients. Further, central banks even if non-bank for international settlements (BIS) should be allowed to invest as Category-I FPIs.

Regulating overseas investments is a sensitive issue. On the one hand, regulators have to provide friendly policies, on the other hand, they have to ensure that market integrity is not compromised by cross-border investors.

Besides deferring a decision on permitting FPIs to invest in unlisted companies, the panel has also said allowing FPIs to invest through domestic mutual funds (MFs) also needs mode deliberations. Sebi will collect public feedback on the various proposals till June 14 and later take a decision on finalising them.