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Foreign Portfolio Investors Investments in India

September 2015

Overview - Portfolio Investments in India

The Government of India announced for the first time the policy framework for foreign institutional investors permitting them to invest in the Indian listed entities which regime subsequently culminated into the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations 1995 (FII Regulations). Presently, foreign investors are allowed to invest in the Indian capital markets through different investment windows (foreign direct investment, portfolio investment scheme and foreign venture capital) investment, each of which has its own regulatory framework, licensing/registration requirements and investment conditions

Investment by the Foreign Institutional Investors (FIIs) in India was jointly regulated by the securities market regulator, the Securities and Exchange Board of India (SEBI), through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the nation’s financial regulator, the Reserve Bank of India, through the Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999

In order to reduce the overall complexity and number of regulations governing inbound investments, in 2014 SEBI have notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations) which aims to rationalize foreign investments made into India by the portfolio investors such as the FIIs and Qualified Foreign Investors

Regulatory Framework – Investments in India

Erstwhile Model

Foreign Institutional

Investors (FIIs)Sub-Accounts

of FIIs

Qualified Foreign

Investors (QFIs)

Foreign Portfolio Investors (FPIs)

Portfolio Investments

CurrentModel

Foreign Venture Capital Investor (FVCI)

Foreign Venture Capital Investor (FVCI)

Foreign Direct Investment

(FDI)

Venture Capital Investments

Direct/Strategic Investments

Foreign Direct Investment

(FDI)

No Change No Change

Eligibility Criteria of Foreign Portfolio Investor

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FPI should not be:

A non-resident Indian; and

A resident of a country listed in the specified public statementsissued by Financial Action Task Force

FPI should be:

A person1 not resident in India2;

A resident of a country whose securities market regulator is asignatory to International Organization of SecuritiesCommission’s Multilateral Memorandum of Understanding(Appendix A Signatories) or is signatory to bilateral Memorandumof Understanding with the SEBI;

Resident of a country whose Central Bank is a member of Bankof International Settlements in case of Bank applicant;

Legally permitted to invest in securities outside its home country;

Authorized by its Constitution documents / agreement toinvest on its own behalf or on the behalf of its clients;

A fit and proper person3 based on the criteria specified bySEBI; and

Grant of certificate to the applicant is in the interest of thedevelopment of securities market.

FPI should also have sufficient experience, good track record, is professionally competent, financially sound and has a generally good reputation of fairness and integrity

Fund having Non-Resident Indian (NRI) investors not prohibited to obtain registration

Private Banks and Merchant Banks allowed to undertake only proprietary investments

1The term “person” shall have the same meaning as assigned to it under section 2(31) of the Income-tax Act, 1961

2The term “resident in India” shall have the same meaning as assigned to it under section 6 of the Income-tax Act, 1961

3 An FPI shall be deemed as a ‘fit and proper person’ after taking into account the following criteria at the minimum in relation to the applicant, the principal officer and the key management persons:(a) integrity, reputation and character(b) absence of convictions and restraint orders(c) competence including financial solvency and networth


Category of FPIs

FPI Category SEBI Fees(every 3 years)

Type of Investors Privileges & Restrictions

Category I

(Low Risk)

NIL This category shall include Government and Government related entities such as Central Banks, Governmental agencies, sovereign wealth funds and international or multilateral organizations or agencies.

Can issue Offshore DerivativeInstruments (ODIs)

Category II

(Moderate Risk)

USD 3,000 Regulated broad-based funds (please refer next slide) such as mutualfunds, investment trusts, insurance/reinsurance companies

Regulated persons such as banks, asset management companies,investment managers/ advisors, portfolio managers

Broad-based funds not ‘appropriately regulated’ (please refer next slide)but whose investment manager (including investment advisor or trustee)is appropriately regulated and registered as Category II FPI

University Funds, Pension Funds and University related Endowmentsalready registered with SEBI

Can issue ODIs,except non-regulated broad-based funds cannot issue / subscribe

Category III

(High Risk)

USD 300 All others FPIs not eligible under Category I and II such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices

Cannot issue ODIs

Broad-based fund means a fund established or incorporated outside India which fulfill following conditions at all times:

Sr. No Conditions Explanation

1 Should have at least 20 investors

To ascertain the number of investors in the Fund, direct and underlying investors are to be considered

Only investors of entities set-up for sole purpose of pooling funds and making investments are to be considered for ascertaining the underlying investors in the Fund

Funds having NRI as investor is not prohibited from obtaining registration

2 No single investor should hold more than 49 percent of the shares / units of the Fund

Institutional investor could hold more than 49 percent of the shares / units of the Fund as long as it is a broad based fund

• Conditional registration available subject to certain conditions and broad based criteria being met within 180 days

• FPI deemed broad based if it has a bank as an investor

Appropriately Regulated means an applicant falling in Category II regulated or supervised by the securities market regulatoror the banking regulator of the concerned foreign jurisdiction, in the same capacity in which it proposes to make investments in India

Definitions


Registration Process

Registration Conditions

Documents needed from FPIs for registration

• FPI application form

• Declaration and undertaking

• Ultimate Beneficial Owner (UBO) letter

• Constitution documents including evidence of being regulated

• Prospectus/ Offering Memorandum of the Fund (in case of funds)

• PAN card instruction to open FPI account

• KYC documents as per Applicant category

Registration discussion to invest in the

Portfolio Route

1

Applicant sends soft copy of the documents for FPI registration for review

to DDP in India. Applicant also makes application for Permanent Account

Number (PAN) card through their tax advisor

2

Applicant clarifies on feedback and queries

raised

4

Fees paid by Applicant to DDP for

registration

5

FPI registration is granted to the

Applicant

6DDP applies for trading codes

and sends confirmation to the FPI once accounts are

opened

7

Account details shared by the FPI with their brokers who would be executing

their trades on the exchange

8 Go live with market trades

9

DDP checks the registration

documents and provides feedback

3

• An applicant (newly incorporated / established) whointends to register as Category II FPI but does not meetbroad-based criteria, may apply for conditional registrationwith a validity of 180 days if it is an India dedicated fund,or undertakes to:

- make investment of atleast five percent corpus of thefund in India; and

- comply with the broad-based criteria before thevalidity of its conditional registration i.e. within 180days

• In case DDP issues acknowledgement regarding fulfilmentof broad-based criteria, the conditional registration shall betreated as registration

• If the FPI fails to meet the broad-based status within 180days, it will be reclassified as Category III FPI

• If an existing broad-based fund registered as Category IIFPI, ceases to remain broad-based on account ofredemption etc., it will have to fulfill criteria mentionedabove for conditional registration

• FPIs who meet the following conditionsshall not be treated as having opaquestructure :

- are regulated in its homejurisdiction;

- each fund or sub fund in theapplicant satisfies broad basedcriteria; and

- gives an undertaking to provideinformation regarding its beneficialowners as and when SEBI seeksthis information

• DDPs shall not allow entities having opaque structure (wherein details of ultimate beneficiary owners are not known or where the beneficial owners are ring fenced from each other etc.) to register as FPIs


Know Your Client Norms - FPI

Key differences - FII & FPI Regulations

Document Type Category - I Category - II Category - III Erstwhile KYC requirement

Entity Level

Constitutive Docs Required Required Required Required

Proof of Address Power of Attorney mentioning address is acceptable

Power of Attorney mentioning address is acceptable

Power of Attorney mentioning address is acceptable

Required

PAN Card Required Required Required Required

Financials *Exempt *Exempt Risk Based-Financial data sufficient Required (Exempt for SWFs)

Board Resolution to invest in India

*Exempt Required Required Not Required

Uniform Know YourClient (KYC) Form

Required Required Required Required

Senior Management (Whole Time Directors/ Partners/ Trustees/etc)

List of personnel Required Required Required Required

Proof of identity *Exempt *Exempt Entity declares on letterhead - Full name, nationality and Date of Birth or Proof of Identity

Required

Proof of Address *Exempt *Exempt Declaration on Letter head Required

Photographs *Exempt *Exempt *Exempt Required

Authorized Signatories

List & Signatures Required Required Required Required

Proof of identity *Exempt *Exempt Required Not Required

Proof of Address *Exempt *Exempt *Declaration on Letter Head Not Required

Photographs *Exempt *Exempt *Exempt Only photograph of signer on the KYC form is required in page 1

Ultimate Beneficial Owner (UBO)

List *Exempt Required (can declare no UBO over 25%)

Required Required (Exempt for SWFs)

Proof of identity *Exempt *Exempt Required Not Required

Proof of Address *Exempt *Exempt *Declaration on Letter Head Not Required

Photographs *Exempt *Exempt *Exempt Not Required

* Not required for cash account opening. However, FPIs must submit an undertaking that upon demand by Regulators/Law Enforcement Agencies the relative documents would be submitted to the DDPs

Particulars Erstwhile FII Regulations Current FPI Regulations

Regulatory Structure 2 Tier Structure - Main FII and sub-accounts No tiers

Registering Institution SEBI DDP on behalf of SEBI

Issuance of ODIs (Participatory Notes)(Please also refer next slide) Only permitted for Main FIIs Permitted for Category I and Category II FPIs

except unregulated broad-based funds

KYC Procedure Uniform KYC Risk based KYC

Permitted Investments

Equity, Government Securities, Corporate Debt, Mutual Funds, Listed equity derivatives, Securities Lending and Borrowings, Interest Rate Future, Indian Depository Receipts, Security Receipts, Rupee bonds or units issued by Infrastructure Debt Fund, Commercial Paper

Same as FII (except unlisted equity). Additionally, FPIs are also permitted to do currency-risk hedging

Investment Limits and restrictions

• For any portfolio investing entity up to 10 percentof paid-up capital of the company

• Aggregate FII investment limit of 24 percent ofpaid-up equity capital in a company (extendable tosectoral cap)

• For any portfolio investing entity below 10percent of paid-up capital of the company

• Aggregate investment limit of 24 percent ofpaid-up equity capital in a company(extendable to sectoral cap)


Issuance of ODIs

Investment Limits and Restrictions

• No FPI may issue, subscribe to or otherwise deal in ODIs,

directly or indirectly, unless such ODIs are issued:

– only to persons who are regulated by an appropriate foreign

regulatory authority;

– after compliance with KYC norms

• Category I & II FPIs (other than unregulated broad based funds)can issue, subscribe to or otherwise deal in ODIs

• ODIs issued before start of the FPI Regime as on 7 January2014 as well as the existing ODI subscribers as on that dateare grandfathered

• ODI issuers may continue to issue ODIs to those subscriberseven if there is a change in their investment manager, providedthe incumbent is a regulated entity

• ODI issuer can issue ODIs to existing entities, which wereregistered as clients but did not have positions as on 7 January2014

• FPIs to fully disclose to SEBI, information concerning theparties to ODIs and terms of issue

DEBT

Instrument Eligible Investor Limit Remarks

Government Securities FPIs and Long term investors– Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks

USD 25 billion

Eligible investors permitted to make investments in government securities/ bonds with a minimum residual maturity of three years.

Government Securities- long term FPIs which are Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks

USD 5 billion Eligible investors permitted to invest only in dated securities of residual maturity of one year and above.

Note:• FPIs are permitted to invest in Government Securities, the coupons received on investment in Government Securities.•

•

The coupons invested in purchasing Government securities shall be classified into a separate investment category which is over and above the USD 30 billion Governmentdebt limitFor the purpose of investment of coupons, the FPIs shall have an investment period of 5 working days from the date of receipt of the coupon. A re-investment facility of 5working days shall be provided on the Government securities that have been purchased by utilizing the coupons

• Coupons received on these Government securities purchased by investment of coupons shall also have the same facility

Corporate DebtFPIs and Long term investors –SWFs, Multilateral Agencies, Pension/ Insurance/ Endowment Funds, Foreign Central Banks

USD 51 billion

Investment in Commercial Papers permitted only up to USD 2 billion within the limit of USD 51 billion

Eligible Investors permitted to make investments in corporate bonds with a minimum residual maturity of three years

FPIs are not permitted to make any further investments in liquid and money market mutual fund schemes

No lock-in period and FPIs be free to sell the securities (including those that are presently held with less than three years residual maturity to domestic investors

Total USD 81 billion

EQUITY• Holding of equity shares of each company by any portfolio investing entity shall be below 10 percent of paid-up capital of the company

• Aggregate FPI investment limit of 24 percent of paid-up equity capital in a company (extendable to sectoral cap)

• FPIs cannot invest in unlisted and physical securities

Note: FPIs are barred from making investments in Treasury Bills

How KPMG can assist

• In identifying suitable jurisdictions for setting-up funds forinvestment in India and also provide assistance in implementingthe identified investment structure

• In review of FPI application etc. to Designated DepositoryParticipant (DDP)

• In obtaining a PAN

• We have a specialized dedicated team working to accurately andexpeditiously perform computation of capital gains tax liability onthe sale transactions executed by the FPI

• Computing and assisting in monitoring advance tax payments

• Assisting in preparing and filing of annual tax returns

• Assisting in audit/ appellate proceedings before the tax authorities

• Timely updates on tax and regulatory developments

We actively participate in the meetings with the Regulators - Department of Financial Services, Department of Economic Affairs, Ministry of Finance, Government of India, SEBI and Reserve Bank of India

Why KPMG

We have been providing services to over 800 FII and sub-account clients over a decade

Dedicated teams of professionals who efficiently manage the ongoing tax compliance requirements of FPIs in India. Our team of experts has an in-depth knowledge of local laws, as well as practical experience with issues relating to FPIs investments into India

We have good working relationships with all the leading Indian DDPs / custodians providing custody services to FPIs investing into India.

Conduct road shows along with local custodian bankers to update on India tax developments

Regular flash alerts and knowledge sharing calls on tax and regulatory matters including Indian Budget.

This presentation is prepared solely for informational purposes. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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Notice to the reader:

Thank you

Key Contact

Naresh MakhijaniPartnerFinancial ServicesT: +91 22 3090 2120M: +91 98923 33376E: [email protected]


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