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Sebi issues norms for FPIs' registration with depositories
January, 09th 2014

Ushering in a new regime for overseas investors as foreign portfolio investors (FPIs), market regulator Securities and Exchange Board of India (Sebi) on Wednesday issued operating guidelines for depository participants to register these new entities and to ensure that their combined holding in any listed company remains capped at 10 per cent.

The operating guidelines have come a day after Sebi notifying FPI Regulations, 2014. This new class of investors would encompass all foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFIs).

Sebi-approved designated depository participants (DDPs) would grant registration to FPIs on behalf of the regulator and also carry out other allied activities in compliance with regulations.

Each FPI will engage a DDP before making investment in Indian securities market. At all times the DDP and custodian of securities of the FPI will be the same entity, Sebi said in a circular.

The investors applying for registration as FPI needs to fill a form comprises informations like name, category of the applicant, name of the country, whether the applicant is 'fit and proper' among others.

In case of an applicant being a bank or its subsidiary, the respective DDP will forward the relevant details of the applicant such as its name and address to Sebi. The regulator would in turn request the Reserve Bank of India (RBI) to provide its comments.

Based on the comments received from the apex bank, Sebi would intimate the comments of the apex bank to DDP accordingly.

According to Sebi, "the depositories shall ensure that the aggregate holdings of all FPIs belonging to the same investor group should remain below 10 per cent of the paid up capital of the investee company".

In case the aggregate holdings of FPIs belonging to same investor group exceeds 10 per cent limit, depositories will put in place appropriate procedures and mechanism to bring back the holdings within the stipulated investment limit, in a reasonable period of time not exceeding seven days.

Also, the depositories will report the details of those FPIs who are responsible for such breach of investment limit to Sebi, forthwith.

These operational guidelines for DDPs are issued to facilitate implementation of Sebi (FPI) Regulations 2014.

As per the FPI norms, FPIs have been divided into three categories as per their risk profile. The category-I FPIs, which would be the lowest risk entities, would include foreign governments and government related foreign investors.

Category II FPIs would include appropriately regulated broad-based funds, whose investment manager is appropriately regulated, university funds, university-related endowments and pension funds. The Category III FPIs would include all others not eligible under the first two categories.

If an applicant is newly incorporated seeking to register itself under Category II, but does not satisfy the criteria at the time of making application, the DDP may give conditional registration for a validity of 180 days to such applicant providing applicant is an India dedicated fund or undertakes to make investment of at least five per cent corpus of the fund in India.

In case the FPI fails to satisfy criteria within 180 days, it will be reclassified as category III.

Besides, FPI can surrender its registration certificate by making an application to the DDP.

The DDP will accept the application after ensuring that there are no dues by the applicant outstanding to Sebi, the holdings of the concerned applicant in security account and bank account is nil and the regulator has given its no objection certificate (NOC).

According to Sebi, if there is a change in information pertaining to direct or indirect change in control, change in regulatory status and change in category, provided by the applicant to depositories, then such applicant will forthwith inform the same to depositories.

"Where there is a delay of more than six months in intimation of material change by the FPI to the DDP, the DDP shall, forthwith, inform all such cases to Sebi for appropriate action, if any," Sebi noted.

At the time of expiry of registration, the FPI desiring permission for disinvestment will make a request to DDP along with details of its holdings. The DDP may grant such permission with an initial validity period of six months.

If the FPI fails to sell the securities within six months, it can approach the DDP for extension of permission.

With regard to taxation, DDP will set up a mechanism for tax deduction and payment in compliance with the directions issued by the Income Tax Department/CBDT/RBI from time to time.

The regulator said that in case an FPI ceases to be member of the International Organisation of Securities Commissions (IOSCO) or concerned jurisdiction is listed in Financial Action Task Force (FATF) public statement as 'high risk' and 'non-cooperative' jurisdiction, then concerned custodian will not allow such FPIs to make fresh purchases till the time the jurisdiction is compliant with the FPI Regulations.

However, the FPI will be allowed to continue to hold the securities already purchased by it.

For change in DDP or custodian, the request for such change will be intimated to Sebi. In case the FPI has undergone a change in name, the request for updation of new name should be submitted by the FPI to the DDP accompanied by documents certifying the same.

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