FPIs have been withdrawing from Indian equity market after a higher tax surcharge on the super-rich was introduced in the budget in July.

SEBI eases regulatory framework for FPIs relaxes buyback norms
Money FPIs Thursday, August 22, 2019 - 14:49
Written by  S. Mahadevan

Foreign Portfolio Investors (FPIs) were quite upset with the Indian government for having increased the tax surcharge on the high-income entities in the budget. The Securities and Exchange Board of India (SEBI), the regulatory body, has now come out with a few decisions that might please the FPIs.

SEBI’s decisions came about after its board meeting on Wednesday. There were two major issues addressed, as far as the FPIs were concerned. One is the very basic categorization process adopted so far. Foreign Portfolio Investors are so far slotted into three categories, I, II and III. The main criterion used for the categorization was the way the investor was being controlled back in its home country and the number of investors the fund has. The better controlled entities will have a smoother KYC (know your customer) and easier registration process to start investing in Indian bourses. These companies or investors will be in Category I. The more complicated it becomes in terms of the country of origin of the FPI and other details the norms become tighter and the other categories, II and III come into play. In its latest decision, SEBI has clubbed II and III categories into on making it only FPI Categories I & II. Now how these are implemented on the ground, remains to be seen.

FPIs have been generally a little concerned about the KYC processes followed in India. This new decision will hopefully make it easier for them to do their business here. There has been a relaxation in so far as the selling of buying of unlisted, suspended or illiquid shares in the market to FPIs. There will be no bottleneck in this area, going forward. Even the norms relating to the P-Notes have been eased for the FPIs, it is learnt.

Lastly, SEBI will henceforth permit offshore funds floated by Indian asset management companies to register themselves as FPIs and invest in Indian markets. All these changes by SEBI are in line with the recommendations of the H.R. Khan committee. In order to simplify things for the FPIs, 57 circulars on the norms etc. have been collapsed into one with some 183 FAQs added into it. This will mean a single document and reference point for the FPIs who wish to enter the Indian markets.

The other major decision that SEBI’s board has taken in its boards meeting yesterday is with regard to the buyback of shares of companies that own non-banking finance companies or housing finance companies as their subsidiaries. The irking point of debt-equity ratio (DER) is now being relaxed to make it easier for these large conglomerates to buy back the shares of the troubled NBFCs or HFCs and try and revive them. The new decision says the computation for DER will exclude the NBFC or HFC subsidiary and the consolidated firm alone has to have the 2:1 stipulated DER post buyback. The DER or the subsidiaries can go up to 6:1.

The board meeting of the regulator addressed the issue of rating agencies often being singled out for faulty rating on instruments since the companies don’t share full details with them. To correct this, there is a fiat that the rating agencies will henceforth enter into an agreement with the issuer of shares or debentures which permits the rating agency to obtain full information on the loans and liabilities so that the rating agency can come to an informed decision while putting out the ratings.

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