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Amendment to FPI Regulations, 2019: Dealing with Securities Post Expiration of Registration

Finsec Law Advisors

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SEBI has introduced amendments to the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”), through the SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2024, dated May 31, 2024 (notified on June 3, 2024) (“FPI Amendments”). The FPI amendments are operationalized through the SEBI Circular dated June 5, 2024, which outlines the detailed framework for their implementation (“Operational Circular”).

Regulation 7(5) of the FPI Regulations mandates that FPIs holding securities in India must maintain a valid registration with SEBI. According to the FPI Regulations and the Master Circular for FPIs, an FPI registration is valid for a three-year period. To extend this registration for another three years, FPIs must pay the registration fee and submit the required supporting documents to their respective DDPs before the expiration of their registration. Previously, prior to the notification of the FPI Amendments and the Operational Circular, FPIs that failed to pay the registration fee to the DDP before their existing registration expired were not allowed to apply for a continuance after expiration. Instead, they were required to submit a new registration application after surrendering their previous registration. To surrender their registration, FPIs had to ensure a ‘Nil’ balance in their account. Without a liquidation mechanism for unsold securities post-expiry, the FPI could only authorize its custodian to write off the securities held in its account. This meant extinguishing the securities from the safekeeping account and freezing them in the FPI’s demat account. As a result, these securities remained indefinitely frozen in the FPI’s demat account.

The FPI Amendments aim to provide FPIs with greater flexibility in managing their securities post the expiry of their registration. The proviso to Regulation 7(5) of the FPI Regulations has been amended to grant FPIs, whose certification of registration is not valid as on the date of commencement of the FPI Amendments, a period of 360 days to dispose of its securities. Similarly, an FPI whose registration is not renewed can sell securities or close derivatives positions in India within 360 days after the 30-day late fee period. In terms of Para 18 of the Operational Circular, an FPI shall be allowed to sell/dispose of the securities within a period of 180 days from the date of the Operational Circular without any financial disincentives. Post expiration of the 180-day period, the sale of securities during the ‘additional 180-day period’ shall be subject to a financial disincentive of 5% of sale proceeds. The Custodian shall deduct the sale proceeds and remit the amount to Investor Protection and Education Fund (IPEF). Further, the FPI Amendments and the Operational Circular stipulates that an FPI whose certificate of registration is not valid and has not sold off the securities or wound up their open position in derivatives in India shall be deemed to have written off the securities. Consequently, the FPI shall lose any beneficial interest in these securities, including voting rights or any benefits arising from corporate actions.

Beyond the disposal timelines, the amendments introduce certain requirements and changes aimed at enhancing the regulatory framework for FPIs. The amendments provide procedures for the re-activation of FPI registration, pursuant to payment of late fees. Additionally, the amendments introduce specific provisions for dealing with unlisted and delisted securities. During the additional period of 180 days, the sale of suspended, unlisted, or delisted securities will be allowed through off-market transactions subject to pricing guidelines outlined in FEMA Rules. The FPI Amendments represent a significant step towards providing FPIs with greater operational flexibility while ensuring robust regulatory oversight. The detailed framework outlined in the Operational Circular effects the regulatory changes, ensuring that FPIs can manage their securities efficiently post expiry of registration.

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