0.1717
900 319 0030
x

Relaxation of SEBI’s FPI Norms

iasparliament Logo
August 23, 2019

Why in news?

  • The Securities and Exchange Board of India (SEBI) has relaxed the regulatory and compliance framework for foreign portfolio investors (FPIs).
  • FPI regulations have been redrafted based on the recommendation of a committee headed by former RBI deputy governor H R Khan.

What is FPI?

  • Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors in another country.
  • It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.
  • Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy.
  • In a developing economy, foreign portfolio investors (FPIs) are perceived to be more uncertain than domestic institutional investors.
  • Thus, foreign investment flows tend to be less stable as these are influenced by global liquidity drivers.

 What are the key changes?

  • The changes come as part of efforts to simplify and expedite the registration process for foreign portfolio investors (FPIs).
  • SEBI simplified the documentation requirements for KYC, for foreign portfolio investors.
  • It also permitted them to carry out off-market transfer of securities.
  • The changes did away with the broad-based eligibility criteria for institutional FPIs.
  • Under the new framework, FPIs would be classified into two categories instead of three.
  • The requirements for issuance and subscription of offshore derivative instruments (ODIs) have also been rationalised.
  • Mutual funds with offshore funds too can invest in India after registration as FPIs to avail certain tax benefits now.
  • Central banks that are not members of the Bank of International Settlements are also allowed to register as FPIs and invest in the country under the new norms.
  • This is to attract more overseas funds into the market.
  • SEBI has allowed entities registered at an international financial services centre (IFSC) to be automatically classified as FPIs.
  • This might help foreign investors bypass some of the restrictions.
  • FPIs shall be permitted for off-market transfer of securities, which are unlisted, suspended or illiquid, to a domestic or foreign investor.
  • Besides, registration for multiple investment manager (MIM) structures has been simplified.

What is the possible rationale?

  • SEBI’s move could have possibly been motivated by the recent flow of funds out of India’s capital markets.
  • Capital in excess of Rs. 20,000 crore has left Indian shores in the recent period.
  • This was an after effect of the decision in Union budget 2019 to increase taxes on FPIs.
  • Policymakers were clearly under pressure to do something to allay the fears of foreign investors.
  • The SEBI’s move is much in line with addressing this.

What is the significance?

  • The easing of regulatory restrictions are likely to make life easier for foreign portfolio investors (FPIs).
  • Smart cities, along with other urban development agencies, will now be allowed to issue municipal bonds to raise funds for development.
  • These measures to cut red tape will help lower the regulatory burden on investors.
  • It will also help globalise India’s financial markets, and aid the growth of the broader economy by increasing access to growth capital.

What are the shortfalls?

  • There remains a broader trend of capital flowing out of emerging markets across the world.
  • Given this, it remains to be seen whether SEBI’s present move will yield immediate benefits.
  • Even if it fails to do so, the move will still help Indian markets become more attractive to foreign investors in the long-run.

 

Source: Business Standard, The Hindu

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme