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Revision of the FPI norms: 'Acche Din' ahead for NRIs and OCIs

Finsec Law Advisors

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To the great consternation of the Foreign Portfolio Investment (“FPI”) sector, SEBI had issued a circular on April 10, 2018 (“April Circular”), inter alia, barring non-resident Indians (“NRIs”) and overseas citizens of India (“OCIs”) from being beneficial owners (“BOs”) of FPIs. Pursuant to outcry from the FPI sector, SEBI constituted a working group headed by Mr. H.R. Khan (“Khan Committee”) to review the April Circular. Finsec Law Advisors and Asset Management Roundtable of India (“AMRI”) were invited to a meeting of the Khan Committee.

In its board meeting held on September 18, 2018, SEBI provided its in-principle approval to the recommendations of the Khan Committee, and to the respite of the FPI Sector, on September 21, 2018, SEBI issued two circulars (here and here)dealing with the matters of eligibility conditions and KYC requirements for FPIs (referred together as “September Circulars”), which superseded the April Circular. Some of the key highlights of the new relaxed FPI norms are discussed below:

Delinking of KYC requirements and eligibility criteria:

The April Circular had stipulated that BO should be identified in accordance with the definition of BO provided in the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) and NRIs/OCIs cannot be BOs of FPIs. However, as suggested by the Khan Committee, SEBI has, vide the September Circulars, set aside the restriction on NRIs/OCIs to be BOs of FPIs. The September Circulars provide that the definition of BO will now be used to identify NRIs/OCIs strictly for the purposes of KYC requirements and such NRIs/OCIs will not automatically be barred from being constituents of FPIs. Therefore, the aforesaid changes have removed the blanket ban on NRIs/OCIs. However, for KYC requirements, FPIs must now disclose all NRIs/OCIs who are BOs.

Identification of BOs in partnership firms:

SEBI has broadened the scope of who can be identified as a BO with respect to FPIs structured as partnership firms. The identification of BOs will now not only be based on the economic interest test (i.e. persons holding 15% or more in a partnership firm) but also on the control test (i.e. control over the affairs of an FPI, including having the right to appoint majority of the directors or to control the management or policy decisions of the FPI or having management rights over the FPI).

The Control test is here to stay:

As an eligibility condition, the FPI norms continue to restrain NRIs/OCIs from being in control of an FPI. However, an exception has been made for FPIs who are controlled by an investment manager (must be an appropriately regulated entity) which in turn is controlled by an NRI/OCI. This change has come as a breather for many NRIs/OCIs, as several India centric FPIs are structured in the abovementioned manner. However, as an additional condition, investment managers of FPIs who are controlled by NRIs/OCIs need to be registered with SEBI as non-investing FPIs.

To conclude, SEBI has moved forward in the right direction and has dispelled the anxiety of the FPI sector. The relaxation of the FPI norms may also help to bring in more foreign investment into India. Though the industry seems to be satisfied at the moment, in the near future it is hoped that SEBI will reconsider other FPI related issues including relaxation of the cap of ‘below 50%’ on NRI/OCI participation in FPIs.