Thursday, February 28, 2013

Budget 2013: Foreign Portfolio Investment

The Finance Minister has sought to streamline the currently complex regime for foreign portfolio investment. The Budget speech notes:

- There are many categories of foreign portfolio investors such as FIIs, sub-accounts, QFIs etc. and there are also different avenues and procedures for them. Designated depository participants, authorised by SEBI, will now be free to register different classes of portfolio investors, subject to compliance with KYC guidelines.

- SEBI will simplify the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors. SEBI will converge the different KYC norms and adopt a risk-based approach to KYC to make it easier for foreign investors such as central banks, sovereign wealth funds, university funds, pension funds etc. to invest in India.

- In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is Foreign Institutional Investment (FII), I propose to follow the international practice and lay down a broad principle that, where an investor has a stake of 10 percent or less in a company, it will be treated as FII and, where an investor has a stake of more than 10 percent, it will be treated as FDI. A committee will be constituted to examine the application of the principle and to work out the details expeditiously.

This approach is based on the recommendation of the Working Group that issued its report back in 2010. However, at that time it was not implemented in the manner intended. While the objective was to streamline the various available schemes for foreign portfolio investment, an additional category of qualified foreign investors (QFIs) was created which failed to gain momentum and added to the slew of options.

On this occasion, SEBI has already initiated the streamlining process last year, and with the Budget announcement the other regulators such as the RBI would also be expected to bring their procedures in line with the objective. This will hopefully address some of the concerns relating to foreign portfolio investment and at least partially avoid the exportation of capital markets discussed in the post earlier today.

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