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
Venture Capital
Investments
Portfolio Investments
Foreign
Institutional
Investors (FIIs)
Erstwhile
Model
Sub-Accounts
of FIIs
Qualified
Foreign
Investors
(QFIs)
Foreign
Venture Capital
Investor (FVCI)
No Change
Current
Model
Foreign
Venture Capital
Investor (FVCI)
Foreign Portfolio Investors (FPIs)
Direct/Strategic
Investments
Foreign Direct
Investment
(FDI)
No Change
Foreign Direct
Investment
(FDI)
Eligibility Criteria of Foreign Portfolio Investor
FPI should not be:
 Authorized by its Constitution documents / agreement to
invest on its own behalf or on the behalf of its clients;
 A non-resident Indian; and
 A fit and proper person3 based on the criteria specified by
SEBI; and
 A resident of a country listed in the specified public statements
issued by Financial Action Task Force
 Grant of certificate to the applicant is in the interest of the
development of securities market.
FPI should be:
 A
person1
not resident in
India2;
 A resident of a country whose securities market regulator is a
signatory to International Organization of Securities
Commission’s Multilateral Memorandum of Understanding
(Appendix A Signatories) or is signatory to bilateral Memorandum
of Understanding with the SEBI;
 Resident of a country whose Central Bank is a member of Bank
of International Settlements in case of Bank applicant;
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
 Legally permitted to invest in securities outside its home country;
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
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Category of FPIs
FPI Category
SEBI Fees
(every 3
years)
Type of Investors
Privileges &
Restrictions
Category I
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
Derivative
Instruments
(ODIs)
USD 3,000

Regulated broad-based funds (please refer next slide) such as mutual
funds, 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 Endowments
already registered with SEBI
(Low Risk)
Category II
(Moderate
Risk)
Category III
USD 300
(High Risk)
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
Can issue ODIs,
except nonregulated broadbased funds
cannot issue /
subscribe
Cannot issue
ODIs
Definitions
Broad-based fund means a fund established or incorporated outside India which fulfill following conditions at all times:
Sr. No
1
Conditions
Explanation
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 regulator
or the banking regulator of the concerned foreign jurisdiction, in the same capacity in which it proposes to make investments in India
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Registration Process
2
1
7
Registration
discussion to
invest in the
Portfolio Route
DDP applies for
trading codes
and sends
confirmation to
the FPI once
accounts are
opened
DDP checks the
registration
documents and
provides feedback
4
FPI registration is
granted to the
Applicant
Fees paid by
Applicant to DDP for
registration
6
9
8
3
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
Account details shared by
the FPI with their brokers
who would be executing
their trades on the
exchange
Go live with
market trades
Applicant clarifies on
feedback and queries
raised
5
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 Conditions

• An applicant (newly incorporated / established) who
intends to register as Category II FPI but does not meet
broad-based criteria, may apply for conditional registration
with a validity of 180 days if it is an India dedicated fund,
or undertakes to:
-
make investment of atleast five percent corpus of the
fund in India; and
comply with the broad-based criteria before the
validity of its conditional registration i.e. within 180
days

•
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
•
FPIs who meet the following conditions
shall not be treated as having opaque
structure :
-
• In case DDP issues acknowledgement regarding fulfilment
of broad-based criteria, the conditional registration shall be
treated as registration
are regulated in its home
jurisdiction;
-
each fund or sub fund in the
applicant satisfies broad based
criteria; and
• If the FPI fails to meet the broad-based status within 180
days, it will be reclassified as Category III FPI
-
gives an undertaking to provide
information regarding its beneficial
owners as and when SEBI seeks
this information
• If an existing broad-based fund registered as Category II
FPI, ceases to remain broad-based on account of
redemption etc., it will have to fulfill criteria mentioned
above for conditional registration
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Know Your Client Norms - FPI
Entity Level
Senior Management
(Whole Time
Directors/ Partners/
Trustees/etc)
Authorized
Signatories
Ultimate Beneficial
Owner (UBO)
Document Type
Category - I
Category - II
Category - III
Erstwhile KYC requirement
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 Your
Client (KYC) Form
Required
Required
Required
Required
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
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
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
Key differences - FII & FPI Regulations
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 percent
of paid-up capital of the company
Aggregate FII investment limit of 24 percent of
paid-up equity capital in a company (extendable to
sectoral cap)
•
For any portfolio investing entity below 10
percent of paid-up capital of the company
Aggregate investment limit of 24 percent of
paid-up equity capital in a company
(extendable to sectoral cap)
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Issuance of ODIs
•
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 January
2014 as well as the existing ODI subscribers as on that date
are grandfathered
•
ODI issuers may continue to issue ODIs to those subscribers
even if there is a change in their investment manager, provided
the incumbent is a regulated entity
•
ODI issuer can issue ODIs to existing entities, which were
registered as clients but did not have positions as on 7 January
2014
•
FPIs to fully disclose to SEBI, information concerning the
parties to ODIs and terms of issue
Investment Limits and Restrictions
Instrument
DEBT
Eligible Investor
Limit
Government Securities
FPIs and Long term investors– Sovereign Wealth Funds
(SWFs), Multilateral Agencies, Pension/ Insurance/
Endowment Funds, Foreign Central Banks
USD 25 billion
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
Remarks
Eligible investors permitted to make investments in
government securities/ bonds with a minimum residual
maturity of three years.
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 Government
debt limit
• For 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 5
working 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
Investment in Commercial Papers permitted only up to
USD 2 billion within the limit of USD 51 billion
Corporate Debt
FPIs and Long term investors –SWFs, Multilateral
Agencies, Pension/ Insurance/ Endowment Funds,
Foreign Central Banks
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
Note: FPIs are barred from making investments in Treasury Bills
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
© 2015 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
How KPMG can assist
• In identifying suitable jurisdictions for setting-up funds for
investment in India and also provide assistance in implementing
the identified investment structure
• In review of FPI application etc. to Designated Depository
Participant (DDP)
• In obtaining a PAN
• We have a specialized dedicated team working to accurately and
expeditiously perform computation of capital gains tax liability on
the 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 indepth 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.
Notice to the reader:
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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arising in any way whatsoever, to any person or party in respect of the matters dealt with in this presentation, including any
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Thank you
Key Contact
Naresh Makhijani
Partner
Financial Services
T: +91 22 3090 2120
M: +91 98923 33376
E: nareshmakhijani@kpmg.com
© 2015 KPMG, an Indian Registered Partnership and a member firm of the
KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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