Sunday, July 7, 2013

Committee Report on Foreign Portfolio Investments

In mid-June, SEBI had announced the submission of a report by the Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments under the chairmanship of Mr. K.M. Chandrasekhar. The full report in now available online.

The key recommendations of the committee are to combine the erstwhile portfolio investment categories of foreign institutional investors (FIIs), sub-accounts and qualified financial investors (QFIs) into a single investor class of “foreign portfolio investor (FPIs)”. This category would permit foreign investment in listed securities of up to 10% equity in a company. If these requirements are not met (or if they are exceeded), the investment would fall within the foreign direct investment (FDI) category. After some deliberation, it was decided to retain two other existing schemes without combining them into the proposed FPI scheme: they are the non-resident Indian (NRI) scheme and the foreign venture capital investor (FVCI). This is due to the special nature of the investment routes. The other significant proposal is the establishment of a self-regulatory mechanism for registration and monitoring of FPIs, which will be overseen by designated depository participants (DDPs) rather than directly by SEBI.

While this consolidation exercise is essential and timely, its implementation would require coordination among several regulatory bodies, primarily SEBI, RBI and the Central Government. Such proposals have been on the anvil since the report of the Working Group on Foreign Investment in India put out in 2010, and although one can expect very little resistance to a simplification exercise such as this, the actual implementation is likely to take some time and may involve some teething troubles as well.

For a deeper analysis and commentary on the consolidation exercise, see this discussion on CNBC India: The Firm and Sandeep Parekh’s column in the Financial Express.

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