SEBI’s Foreign Portfolio Investors Second Amendment Regulations, 2024: A Comprehensive Overview

Introduction:

On June 26, 2024, the Securities and Exchange Board of India (SEBI) notified the SEBI (Foreign Portfolio Investors) Second Amendment Regulations, 2024, amending the existing SEBI (Foreign Portfolio Investors) Regulations, 2019 (hereinafter referred to as “FPI Regulations, 2019”). This amendment introduces significant changes, particularly aimed at providing greater flexibility for Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Individuals (RIs) to invest in Foreign Portfolio Investors (FPIs) based in International Financial Services Centres (IFSCs) in India. These changes are expected to bolster the attractiveness of IFSCs as investment hubs and streamline the regulatory landscape for FPIs(Foreign Portfolio Investors).

Key highlights:

The SEBI (Foreign Portfolio Investors) Second Amendment Regulations, 2024, introduces several pivotal changes aimed at enhancing the flexibility and efficiency of Foreign Portfolio Investments (FPIs) within India’s International Financial Services Centres (IFSCs). One of the most notable amendments is the provision allowing up to 100% aggregate contribution by Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Individuals (RIs) in the corpus of FPIs regulated by the International Financial Services Centres Authority (IFSCA). This significant shift from previous stringent limitations broadens the scope of participation for these individuals, potentially attracting more foreign investment.

Additionally, at the time of registration, FPIs are now required to submit a declaration of their intent to have 50% or more aggregate contributions from NRIs, OCIs, and RIs, with existing FPIs (Foreign Portfolio Investors) given a six-month window to comply. This declaration is subject to review only during the renewal of registration, ensuring a stable and predictable investment environment. To further enhance transparency, FPIs must provide the Designated Depository Participants (DDPs) with copies of PAN cards for all NRI, OCI, and RI individual constituents, or alternative documentation if a PAN is not available. The amendments also exempt applicants in IFSCs from sub-clause (ii) of clause (c) of Regulation 4 of the FPI Regulations, 2019, provided they meet specific conditions, including submitting declarations and relevant documentation for non-individual constituents controlled by NRIs, OCIs, or RIs.

Specific conditions for IFSC-based FPIs include mandatory pooling of all investor contributions into a single investment vehicle with no side-vehicles, ensuring that all investors have pari-passu and pro-rata rights. Moreover, the regulations enforce diversification limits, restricting investments in a single Indian listed entity to a maximum of 20% of the FPI’s corpus and requiring a minimum of 20 diversified investors, with no single investor contributing more than 25% of the corpus. Additionally, investment decisions must be made independently by an Asset Management Company or its IFSC-based subsidiary/branch, ensuring unbiased and professional management.

To align with these new regulations, several modifications have been made to the FPI Master Circular, including the renumbering of sub-paras, insertion of new sub-paras specifying exemptions and conditions for IFSC-based FPIs, (Foreign Portfolio Investors) and adjusting the holding threshold for FPIs not subject to Regulation 4(c) from 50% to 33%. Furthermore, the amendments clarify the breach of prescribed limits for contributions by NRIs, OCIs, and RIs, emphasizing SEBI’s commitment to maintaining a transparent and regulated investment environment. These comprehensive changes reflect SEBI’s strategic approach to fostering a more inclusive and dynamic foreign investment landscape within India’s IFSCs, ultimately contributing to the growth and development of the country’s securities market.

Impact:

The recent amendments introduced by SEBI to the Foreign Portfolio Investors Regulations, 2019, strategically aim to enhance the participation of Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Individuals (RIs) in the Indian securities market, particularly through International Financial Services Centres (IFSCs). By permitting up to 100% contribution from these individuals, SEBI seeks to attract substantial foreign investment, thereby promoting the development of IFSCs as premier global financial hubs. This move is designed to bolster India’s position in the international financial arena and create a more inclusive investment environment.

The amendments place significant emphasis on essential principles such as pooling of investments, ensuring pari-passu rights, and enforcing diversification requirements. These measures are intended to manage investments prudently and equitably, thereby safeguarding the interests of all investors involved. The mandatory requirement for declarations and comprehensive documentation at the time of registration enhances transparency and regulatory oversight, effectively mitigating the risks associated with foreign investments. This rigorous documentation process ensures that all contributions are accounted for and compliant with Indian laws, fostering a secure investment climate.

Furthermore, the amendments mandate that FPIs (Foreign Portfolio Investors) be independently managed, with investment decisions driven by market dynamics rather than individual investor preferences. This independence promotes fair and efficient market practices, ensuring that investment decisions are made objectively based on prevailing market conditions. By implementing these changes, SEBI aims to create a robust, transparent, and investor-friendly framework that will not only attract more foreign investments but also ensure that these investments contribute positively to the growth and stability of the Indian securities market.

Conclusion:

The SEBI (Foreign Portfolio Investors) Second Amendment Regulations, 2024, marks a significant shift in the regulatory framework governing foreign portfolio investments in India. By providing greater flexibility and streamlined processes for NRIs, OCIs, and RIs to invest in FPIs based in IFSCs, SEBI is fostering a more inclusive and dynamic investment environment. These changes are expected to attract higher foreign investment, boost the development of IFSCs, and ultimately contribute to the growth of India’s securities market. As these amendments come into force, stakeholders, including FPIs, DDPs, and potential investors, must familiarize themselves with the new requirements and ensure compliance to leverage the benefits offered by this progressive regulatory update.

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com