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Open for Business - India’s Foreign Portfolio Investor regime
Open for Business - India’s Foreign Portfolio Investor regime

Open for Business - India’s Foreign Portfolio Investor regime


India’s foreign portfolio investor (FPI) regime has been welcomed by those investors who have a strong investment appetite for India.

India’s before-and-after shot

Changes driven by the government under the guidance of the regulators have been positively received by global investors.  Since 1995, when the foreign institutional investor (FII) regulations were first announced by the Government under the guidance of the capital markets regulator, the Securities and Exchange Board of India (SEBI), FIIs had to go through multiple bureaucratic procedures and timelines before investors were able to procure the FII licence to invest in Indian capital and debt markets. This continued up until 2014.

“Just a few years ago, it used to take a long time for a foreign investor to get a trading licence,” says Sanjay Singh, Head of Global Markets at BNP Paribas India. “The paperwork involved in getting a licence and being able to serve, say, 20 accounts, was so voluminous that documentation could be a fulltime job. On-boarding was a time-consuming and complicated process. It often took several months to complete the process,” adds Christophe Beelaerts, Chief Executive of BNP Paribas Securities Services India.

SEBI’s sweeping changes

In June 2014, SEBI revamped the FII regime and brought in the FPI regulations, thereby merging foreign institutional investors, sub-accounts and qualified foreign investors to create a single investor class. The new regime was well received by investors, with over 1,000 new FPIs registered in the subsequent 14 months. Investors were relieved by the smoother entry process and the on-boarding experience, which, according to Beelaerts, was “reduced to just around four to six weeks – quite an achievement”.

Registering the new FPI accounts was the key change. This was delegated to designated depository participants (DDPs) - local custodians that registered themselves with the regulator as DDPs.

With account registrations now managed by DDPs such as BNP Paribas, under the guidance of the regulator, timelines automatically reduced.

Introduction of new risk based categorisation

The new rules were also more streamlined. FPIs were sub-divided into three categories, depending on their risk profile and know-your-customer (KYC) requirements. Category I holds low-risk entities such as foreign governments and state-run investors, including sovereign wealth funds. Category II comprises the largest pool of FPIs, including most broad-based funds, investment managers, etc., while the remainder in Category III. The KYC documentation required varies depending on the categorisation of the client.

SEBI continues the process of evaluating and easing the regulations

From December 2017, SEBI allowed funds located in countries with diplomatic ties to India to apply for FPI licences – boosting the inflow of capital from emerging and frontier markets. Two months later, the regulator improved the approval process to change local custodian. The revised process now gives the powers to the incumbent and new custodian to approve the migrations without needing the intervention of SEBI. “Any client – an asset manager, say, or a global hedge fund – no longer needs to apply to the regulator to get an FPI licence or to change their custodian. Now you can apply for an FPI licence easily with a SEBI authorised DDP like BNP Paribas Securities Services,” says Singh.

“They can approach DDPs directly and apply for FPI registration and within four weeks, post documentation, the FPI can go live for trading. In many cases, the approval process has gone from several months to just a few weeks.”

A common application form

The regulator is looking at best practices to make it easier for foreign investors to put money to work. In his 2017–2018 budget speech, Finance Minister Arun Jaitley flagged up the need for a simple common application form for all new FPIs. Foreign investors currently have to open a bank account and apply for a demat account and a permanent account number, as well as filing a separate form to register themselves with the DDPs.

A common application form would eliminate paperwork, reduce duplication and further ease the process of FPI access to India’s capital markets. The new rules are expected to be introduced in the first half of 2019.

So, is the new-broom regime working?

The new regulations are make life easier for investors. “Everything is so much more streamlined,” says Beelaerts. “The custodian, rather than the regulator, is in charge of compliance and KYC. The real, tangible benefits have been felt by the client and foreign investors are keen to put their money in India.”

SEBI has undertaken a lot of road shows across several countries to showcase the market-friendly framework to the world. “Both SEBI and the two big domestic stock exchanges [the National Stock Exchange of India and the Bombay Stock Exchange] have done a lot of work around the globe to promote the FPI regime,” adds Beelaerts.

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