Tweak in classification norms to ease FPIs’ compliance load

Mumbai: The Securities and Exchange Board of India (Sebi) is planning to tweak categorisation norms for foreign portfolio investors (FPIs), said two people aware of the development. The move will benefit FPIs such as pension funds, charity funds and family-led offices of nonresident Indians (NRIs) in getting licences that mean a lower compliance burden for the entity.The issue was discussed at a meeting between Sebi officials and members of the committee on easing of FPI regulations led by former RBI deputy governor HR Khan. The committee was dissolved in June after it submitted its report to the regulator. However, Sebi has now asked the panel to submit a supplementary report suggesting more FPI reforms.Currently, category-I FPIs consist of sovereign entities, category-II comprises regulated funds, while category-III FPIs are unregulated entities such a family offices.Longstanding DemandSebi is planning to allow pension funds under category I. Further, charity and endowment funds along with family offices coming from select jurisdictions will be eligible for category-II licences. Category-I entities have the lowest compliance requirements while category-III FPIs have the most.Sebi didn’t respond to queries.“It has been a longstanding demand to accord category-I status to pension funds since they are usually government bodies,” said one of the persons. “They were unable to get category-I status until now since the norms say that a fund has to be majority owned by a foreign government to qualify as a sovereign fund.”The move comes as the government faces a backlash from several foreign funds for increasing the tax surcharge applicable on them. Several industry lobbies and representatives of foreign funds met top officials at the PMO last week, seeking relief from the higher levy.The July 5 budget move will impact at least 40 per cent of FPIs that are structured as trusts and associations of persons. Finance minister Nirmala Sitharaman told ET over the weekend that FPIs weren’t the intended target of the measure and that she was prepared to hold discussions with them on converting to a corporate structure to avoid the higher surcharge. The surcharge has prompted a selloff by overseas investors — FPIs have net sold equities worth Rs 11,820 crore in July.The compliance requirement on an offshore fund is based on the category of FPI licence it holds. For instance, category-I FPIs are exempted from some know your customer (KYC) documentation requirements and are not subject to the new beneficial ownership disclosures. Category-III FPIs, on the other hand, are required to disclose their ultimate beneficial owners. They also need to provide documents such as integrity certificates and legal permissibility certificates for registration. Also, category-III FPIs are not eligible for the qualified institutional buyer (QIB) quota in any capital market issues, including initial public offerings (IPOs). They are also subject to taxes under indirect transfer provisions.70474707 Targetting stable flows“The idea is to go beyond the broad categorisation of FPIs based on risk profiles and provide incentives to funds that bring stable flows into the country,” said a member of the committee. “Category-III FPIs have not been active participants in the Indian markets due to the restrictions applicable on them.”Sebi has asked the HR Khan committee to deliberate on which category-III FPIs can be considered for category-II licences since some of the entities maintain opaque structures. Several family offices are promoted by nonresident Indians (NRIs) or persons of Indian origin (PIOs). These can benefit the markets since such entities, unlike the majority of FPIs, are usually India-dedicated investors, tax experts said.“Endowments and family offices domiciled in the US, UK and such other developed nations can be allowed for category-II FPI licences,” said Neha Malviya, director, Wilson Financial Services. “These countries follow stricter anti-money laundering provisions and thereby pose lesser risk.”Of the assets worth Rs 33.8 lakh crore held by FPIs in India, only 5 per cent (Rs 1.6 lakh crore) belongs to category-III FPIs. On the other hand, category-II investors hold 75 per cent of the assets (worth Rs 24 lakh crore). The rest are held by sovereign entities that qualify as category-I investors.

from Economic Times https://ift.tt/2ZqVcaC