Sunday, October 7, 2012

Another Effort at Harmonizing Foreign Portfolio Investment


In 2010, the Working Group on Foreign Investment in India made an important set of recommendations in relation to the consolidation of various types of investment routes for foreign investors making portfolio investments into the Indian markets. The idea was to do away with the various routes presently existing, such as for non-resident Indians (NRIs), foreign institutional investors (FIIs) and foreign venture capital investors (FVCIs). By bringing all these dispersed schemes under one consolidated category of qualified foreign investors (QFIs), the investment route was to be harmonized thereby creating a much simplified regime. What happened thereafter was interesting. The Government introduced the QFI scheme, but not in the manner that the Working Group envisaged. The QFI route was introduced in addition to all the existing routes available thereby creating an additional category, and not by consolidating all routes into one. The efforts resulted in greater fragmentation of the regime rather than a consolidation.

Now, the mantra of consolidation and harmonization of the portfolio investment route is back in the reckoning, this time with SEBI. In a board meeting held yesterday, SEBI has announed its decision to prepared draft guidelines on the lines recommended by the Working Group to create a uniform regime for various types of portfolio investors. While this is a welcome move in terms of simplifying the legal regime, since this involves aspects of foreign investment, it will also require coordination with the Government of India and the Reserve Bank of India so that various foreign investment norms are brought in line with the proposed SEBI guidelines as well.

Minimum Public Shareholding: Among other decisions taken at the board meeting, SEBI has indicated its intention to set up an action plan and processes in conjunction with market participants for ensuring compliance with section 19AA of the Securities Contracts (Regulation) Act, 1956. A formula has also been indicated for defining “shares held by the public” in a company, wherein capital issued by a company outside India (which presumably refers to ADRs/GDRs, etc.) will not be taken into consideration either in the numerator or denominator.

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