foreign portfolio investment operational part

8/10/2019 foreign portfolio investment operational part

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2014-2015

SUBMITTED TO- PROF. RITUPARNA DAS

PROF. PRATEEK DEOL

SUBMITTED BY-

RUCHIKA SINGH

TEK CHAND MEENA

VIVEK KUMAR MISHRA

CORPORATE FINANCE, BANKIG AND

FINANCE,

LL.M. Ist

SEMESTER

NATIONAL LAW UNIVERSITY, JODHPUR

FOREIGN PORTFOLIO

INVESTMENT-ITS REGULATIONS


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[FOREIGN PORTFOLIO INVESTMENT-ITS REGULATIONS]

2 SUBMITTED TO-ASST. PROF. PRATEEK DEOL

SUBMITTED BY-RUCHIKA SINGH, TEK CHAND MEENA AND VIVEK KUMAR MISHRA

| NATIONAL LAW UNIVERSITY

ACKNOWLEDGEMENT

First of all and above of all we would like to give our heartily thanks to our respected teachers

Prof Rituparna Das And Prof Prateek Deol for accepting our Topic Foreign Portfolio

Investment-Its Regulations and for giving us a chance to prove ourselves competent to deal with

such an prominent issue of great importance. It would not be possible without their preciousguidance and support. The proper guidance paved the way on which we walked to achieve this

goal. Again we would like to thank library staff for their support and co-operation by which we

cannot be able to complete our research paper.

Last but not the least, we would like to give many thanks to our friends as they supported and

helped us in various ways in making this project.

Dated:15thOCT- 2014

RUCHIKA SINGH

TEK CHAND MEENA

VIVEK KUMAR MISHRA

CORPORATE FINANCE

LL.M. Ist SEMESTER

NATIONAL LAW UNIVERSITY, JODHPUR


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CONTENT AT A GLANCE:

Introduction..........................................................................................................................3

Classification based registration of investors.....................................................................3

Eligibility criteria for FPIs...................................................................................................4

Instruments available for investment and prescribed limits...............................................5

Taxation of FPIs...................................................................................................................5

Implementation timeline......................................................................................................6

Meaning of FPI.....................................................................................................................6

Categories of FPI..................................................................................................................7

Registration and eligibility criteria for FPI.........................................................................9

Registration criteria for FPI.................................................................................................9

Eligibility criteria for FPI....................................................................................................9

Obligations and responsibilities of FPI...............................................................................12

USB Securities Case............................................................................................................13

CaseGoldman Sachs Dispute...........................................................................................22

Conclusion...........................................................................................................................26

Bibliography........................................................................................................................28


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INTRODUCTION-

In order to harmonize the various available routes for foreign portfolio investment in India, the

Indian securities market regulator i.e. Securities Exchange Board of India ("SEBI") has

introduced a new class of foreign investors in India known as the Foreign Portfolio Investors

("FPIs"). Previously portfolio investment was governed under different laws i.e. the SEBI

(Foreign Institutional Investors) Regulations, 1995 ("FII Regulations") for FIIs and their sub-

accounts.

Essentially, foreign portfolio investment entails buying of securities, traded in another country,

which are highly liquid in nature and, therefore, allow investors to make "quick money" through

their frequent buying and selling. Such securities may include instruments like stocks and bonds,

and unlike shares, they do not give managerial control to the investor in a company.

SEBI introduced a new regulation which comes into the force from September. It, generally,

deals with the types of investors, their eligibility and instruments for investment and taxation etc.

These can be described as follows-

CLASSIFICATION BASED REGISTRATION OF INVESTORS-

FPI has been defined under FPI Regulation 2(h) as a person meeting the eligibility criteria

specified under Regulation 4 (covered under (b) below) and duly registered under Chapter II and

are considered as intermediaries for the purposes of SEBI Act, 1992. Under FPI Regulation 5 the

following three categories of FPIs have been created on the basis of associated risks (a)

Category I includes foreign investors related with the government such as central banks,


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government agencies, sovereign wealth funds; (b) Category II includes regulated entities like

banks, assets management companies, investment managers etc. and broad-based funds, which

may be regulated such as mutual funds, investment trusts etc. or non-regulated; and (c) Category

III includes investors, which are not covered under categories I and II.

ELIGIBILITY CRITERIA FOR FPIS

FPI Regulation 4 prescribes the mandatory eligible criteria for registration as FPI. Here, the

applicant must be a non-resident in India but non-resident Indians ("NRIs") are specifically

prohibited. the applicant is required to be a resident of a country which meets the following

criteria-

its securities market regulator is a signatory to the International Organization of

Securities Commission's Multilateral Memorandum of Understanding or party to an

MOU with SEBI;

whose central bank is a member of the Bank for International Settlements in case if

the applicant is a bank; and

not mentioned in the public statement of Financial Action Task Force as a country

having issues related to combating financing of terrorism or money laundering.

The applicant must also be authorized to invest as per the law of its country of incorporation or

place of business and as per its Memorandum of Association and Articles of Association or any

other equivalent document.

INSTRUMENTS AVAILABLE FOR INVESTMENT AND PRESCRIBED LIMITS-


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FPI Regulation 21 provides for the type of instruments in which FPIs can invest. FPIs can invest

in instruments such as listed or to be listed shares, government securities, units of mutual funds

or collective investment schemes, treasury bills, corporate debt and Indian depository receipts.

For foreign corporates and foreign individuals, the investment limit now stands increased from 5

to 10% of a company's total issued capital.

FPI Regulation 22 has brought a major change relating to issuance of Offshore Derivative

Instruments12 ("ODIs"). ODIs are significant because they allow foreign investors, such as high

net worth individuals and hedge funds based overseas, to invest in the Indian market without

being registered with the SEBI. Now, only FPIs, which are regulated and also fall under

Category I or II can issue ODIs.

TAXATION OF FPIS-

After the FPI Regulations came in force, confusion prevailed among India Inc regarding the

taxation of FPIs. This was because the different classes of investors were taxed differently

previously and there was no clarity as to how the merged FPI will be taxed. The Central Board of

Direct Taxes ("CBDT") came out with a notification 13 dated January 22, 2014 deeming FPIs

registered under the FPI Regulations as FIIs for taxation purposes. The notification indicates that

all investor classes forming the FPIs would be taxed similarly to FIIs.

IMPLEMENTATION TIMELINE-


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The FPI regime has greatly increased the roles and responsibilities of the DDPs. Naturally,

availability of adequate infrastructure and facilities with these local custodians is important for a

proper implementation of the law.

MEANING OF FPI

The term FPI has been defined to mean a person who satisfies the eligibility criteria prescribed

under the FPI Regulations and has been registered under these Regulations. A person is not

permitted to transact in securities as a FPI unless the person has attained a Certificate of

Registration (COR) granted by the Designated Depository Participants (DDPs) on behalf of

Securities and Exchange Board of India (SEBI). An existing FII holding a valid COR shall be

deemed to be a FPI till the expiry of the block of three years for which fees have been paid under

the FII Regulations.

In tightening norms for issuance of Participatory Notes by overseas investors, SEBI has barred

unregulated foreign funds from dealing in offshore derivative instruments even if their

investment managers are appropriately regulated by their concerned regulators. These guidelines

form part of the newly notified Foreign Portfolio Investor (FPI) Regulations. They provide for

stricter oversight of P-Notes, the preferred route for overseas high net worth individuals (HNIs)

and hedge funds for investing in the Indian market. Earlier, according to the draft regulations by

SEBI, it had been proposed that only Category III, or high-risk foreign investors, would be

barred from issuing participatory notes. However, the gazette notification that brought the FPI

guidelines prohibits certain entities under Category II, or medium risk-foreign investors from

issuing P-Notes in the final FPI regulations. P-Notes, or offshore derivative instruments, are


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mostly used by overseas HNIs, hedge funds and other foreign institutions to invest in Indian

markets through registered foreign institutional investors (FIIs), while saving on time and costs

associated with direct registrations.

CATEGORIES OF FPI

In an effort to tighten norms in lieu of the issue of participatory notes (P-notes) SEBI had

initially barred unregulated foreign funds from dealing in offshore derivative instruments even

if their investment managers are appropriately regulated by their concerned regulators. The

guidelines which are part of the newly notified Foreign Portfolio Investor (FPI) Regulations,

have provided stricter oversight of P-notes, the preferred route for overseas high net worth

individuals (HNIs) and hedge funds for investing in Indian market. Earlier, according to the draft

regulations by the Securities and Exchange Board of India, it had been proposed that only

Category III or high risk foreign investors would be barred from issuing P -notes. The gazette

notification that brought the FPI guidelines into forces also prohibits certain entities under

Category II, or medium risk investors from issuing P-Notes. The new FPI regime has classified

foreign investors into three categories based on their risk profile and the KYC (Know Your

Client) requirements and other registration procedures and would eventually replaced existing

categories such as FIIs, their sub-accounts and qualified foreign investors. An applicant can seek

registration as a FPI in any one of the following categories:-

1) Category I - this category includes all government and government-related investors such as

Central Banks, Governmental agencies, sovereign wealth funds and international or multilateral

organizations or agencies.


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2) Category II- This category includes

Appropriately regulated broad based funds such as Mutual Funds, investment trusts,

Insurance/ Reinsurance Companies;

Appropriately regulated entities such as Banks, Asset Management Companies etc;

Broad based funds not appropriately regulated but whose investment manager is

regulated; University Funds and Pension Funds; and University related endowments

already registered with the SEBI as FIIs/sub-accounts.

3) Category III-this category shall include all other FPIs not eligible to be included in the

above two categories such as endowments, charitable societies, charitable trusts, foundations,

corporate bodies, trusts, individuals and family offices.

4) Any other category as may be specified by the SEBI from time to time.

The Securities and Exchange Board of India (SEBI) has recently notified the SEBI( Foreign

Portfolio Investors) Regulations, 2014 (FPI Regulations). These Regulations shall come into

force with effect from 7 January 2014. This new regulation will replace the existing SEBI

regulations for Foreign Institutional Investors (FIIs) and the new class of investors would

encompass as FIIs ,their sub-accounts and qualified foreign investors. Further, the SEBI has also

vide a Circular dated 8 January 2013 (Circular) issued operating guidelines for Designated

Depository Participants who would grant registration to Foreign Portfolio Investors. The FDI

Regulations aim to rationalize foreign investments made into India by portfolio investors such as

Foreign Institutional Investors and Qualified Foreign Investors.


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REGISTRATION AND ELIGIBILITY CRITERIA FOR FPI

REGISTRATION CRITERIA FOR FPI

Designated Depository Participants (DDPs) are empowered to register FPI on behalf of SEBI.

Registration by SEBI has been done away with for FIIs including their sub-accounts, if any.

Generally, it is expected that a DDP will register within 30 days from receipt of application for

registration, complete in all respects. Registration will be permanent unless suspended or

cancelled. In the event of any grievances for seeking registration, the FPI may approach SEBI for

appropriate instructions. DDPs may also seek SEBI guidelines in respect of any interpretation of

the FPI regulations. The FPIs seeking registration under Category I are exempted from payment

Eligibility criteria for FPI

of registration fees. If these various Category I FPIs have common beneficial owners, only one

FPI is exempted from payment of registration fees as applicable to Category II (except where the

beneficial owner is international/multilateral agency such as World Bank and other institutions).

The FPIs seeking registration under Category II and III are liable to pay registration fees of

US$3,000 and US$ 300, respectively for every block of three years.

An applicant desirous of FPI registration should, inter alia, satisfy the following conditions:

The person should be resident in India or a Non-Resident Indian.

The person should be a resident of a country:


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Whose securities market regulator is a signatory to IOSCOs (International Organization

of Securities Commission) Multilateral MOU (Memorandum of Understanding) or a

signatory to a bilateral MOU with SEBI;

Whose central bank is a member of the Bank for International Settlements;

Against whom the Financial Action Task Force (FATF) has not issued any warnings

As having strategic Anti-money Laundering or Combating the Financing of

Terrorism deficiencies; or

As not having made significant progress in addressing the deficiencies or not

committed to an action plan developed with the FATF to address the

deficiencies.

It should be legally permitted to invest in securities outside the country of its

incorporation or establishment or place of business.

It should be authorised by its Memorandum of Association and Articles of Association or

equivalent document(s) or the agreement to invest on its own behalf or on behalf of its

clients.

The person should have sufficient experience, good track record, be professionally

competent, financially sound, have a generally good reputation of fairness and integrity

and meet the fit and proper criteria as prescribed in the SEBI (Intermediaries)

Regulations, 2008.


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The person should not have an opaque structure i.e., any structure such as protected cell

company, segregated cell company, or equivalent, where the details of the ultimate

beneficial owners are not accessible or where the beneficial owners are ring fenced from

each other or where the beneficial owners are ring fenced with regard to enforcement.

Applicants satisfy the following criteria will not be treated as having an opaque structure

The applicant is regulated in its home jurisdiction;

Each fund or sub fund in the FPI satisfies broad based criteria; and

The applicant undertakes to provide information regarding its beneficial owners

as and when sought by SEBI

A COR granted by a DDP shall be permanent unless suspended or surrendered by the FPI

A DDP may grant conditional registration, subject to the fulfilment of specified conditions, with

a validity period of 180 days, to a newly incorporated applicant which does not satisfy the broad

based criteria at the time of making the application but seeks to register itself as a broad based

fund under Category II.

OBLIGATIONS AND RESPONSIBILITIES OF FPI

The obligations and responsibilities of FPI, inter-alia, include:-


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FPIs to obtain a Permanent Account Number (i.e. Indian income-tax registration

number) from the Indian Revenue authorities.

FPI to abide by the code of conduct specified in the FPI Regulations.

FPI , except for an individual FPI, to appoint a compliance officer who shall be

responsible for monitoring the compliance of various rules, regulations, notifications,

etc issued by the DDP or SEBI or the Central Government

An FPI is required to immediately inform DDP in case of any direct or indirect

change in structure of beneficial ownership of the FPI.

A FPI (or any of its employees) shall not render direct or indirect any investment

advice about any security in the publicly accessible media, unless a disclosure of his

interest including long or short position in the said security has been made, while

rendering such advice.

An FPI to maintain proper books of accounts, records and documents and intimate the

DDP about the location where such accounts, records and documents are kept.

USB SECURITIES CASE

USB Security Asia Ltd. V. Securities and Exchange Board of India, (2005) 6 COMP LJ 64

(SAT)


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Date of Decision: 09/09/2005

Decided by: C. Bhattacharya, Member

R.N. Bhardwaj, Member

The appeal has been taken up for the final disposal with the consent of both the parties.

The appeal has been filed by USB Securities Asia Limited, (USB for short) against the

impugned order dated 17/05/2005 issued by whole time member, SEBI, the operative portion of

which reads as under:

"11.1 The findings in this case have highlighted serious regulatory concerns in that the

PN/ODI route and its cover of anonymity is being used by certain entities without there being

any real time check, control and due diligence on their credentials. Such a lapse has very grim

portents as far as the market integrity and interest of investors are concerned. The mechanism

of opening up the Indian securities market through PN /ODI route to entities outside

India imposes a commensurate onus on the registered intermediaries (FIIs) of maintaining high

standards of regulatory compliance, exercise of high due diligence and independent

professional judgment and therefore any gaps in measuring up to the onus may be fraught with

critical repercussions in the market.

"11.2. In the light of the above and in exercise of the powers conferred on me in terms of

Section19of the SEBI Act, 1992, read with Section11(4)and11Bof SEBI Act, 1992, I

hereby prohibit USB/ its affiliates / agents from issuing off-shore derivative instruments with

underlying Indian securities against the positions held by USB in the Indian securities market
http://fnopenglobalpopup%28%27/ba/disp.asp','26054','1');http://fnopenglobalpopup%28%27/ba/disp.asp','26054','1');http://fnopenglobalpopup%28%27/ba/disp.asp','26054','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25648','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25648','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25648','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25651','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25651','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25651','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25651','1');http://fnopenglobalpopup%28%27/ba/disp.asp','25648','1');http://fnopenglobalpopup%28%27/ba/disp.asp','26054','1');


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for a period of one year. I also prohibit USB / its affiliates / agents from renewing or rolling

over any of the ODIs already issued against the positions held by it in the Indian securities

market for a period of one year.

"11.3. I further direct USB to establish highest standards of Customer Due Diligence process in

line with the requirements of FII Regulations of SEBI.

"11.4. This is without prejudice to any other action taken or to be taken by SEBI against

USB in accordance with the provisions of SEBI Act, 1992, the Regulations made there under

or any other law as may be applicable.

"This order shall come into force with immediate effect."

Main Issue

Company - delay in furnishing information - Sections 11, 11B and 15A of Securities and

Exchange Board India Act, 1992 - whether in particular circumstances Order under Section

11B read with Section 11(4) justified - impugned Order speaks of some delay and non

furnishing of information on part of appellant - Section 15A can have handled matter in

question more appropriately instead of invoking provisions of Sections 11B and 11(4) - Section

15A provides exact provision for handling delays in submission of information - question

answered in negative - impugned Order liable to be set aside.

The impugned order goes on explaining and detailing how USB violates regulation 15A of FII

Regulation which reads as under:

Section 15A- (1) A foreign institutional investor or sub-account may issue, deal in or hold, off-

shore derivative instrument such as participatory notes, Equity linked Notes or any other


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similar instruments against underlying securities, listed or proposed to be listed on any stock

exchange in India, only in favour of those entities which are regulated by any relevant

regulatory authority in the countries of their incorporation or establishment, subject to

compliance of know yourclient requirement :

Providedthat if any such instrument has already been issued, prior to 3 rdFebruary, 2004, to a

person other than a regulated entity, contract for such transaction shall expire on maturity of

the instrument or within a period of five years from 3rd, February, 2004, whichever is earlier.

(2) A foreign Institutional Investor or sub-account shall ensure that no further downstream

issue or transfer of any instrument referred to in sub-regulation (1) is made to any person other

than regulating entity.

Judgment

In the main act there is a chapter on penalties and adjudication. Under this chapter section 15A

which specifically deals with situation such as failure to furnish any document, return or report

etc. section 15A reads as under:

(a) to furnish any document, return or report to the board, fail to furnish the same, he shall be

liable to penalty of one lakh rupees for each day during which such failure continues or one

crore rupees, whichever less;

(b) to file any return or furnish any information, book or other documents within the time of

specified thereof in the regulations, fails to file return or furnish the same within the time

specified thereof in the regulations, he shall be liable to a penalty of one lakh rupees for each

day during which such failure continues or one crore rupees, whichever is less;


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(c) to maintain books of account or records, fails to maintain the same, he shall be laible to a

penalty of one lakh rupees for each day during which such failure continues or one crore

rupees, whichever is less.

In the view of the facts and circumstances of the case they do not find any reason to uphold the

orders issued under section 11B and section 11(4) of the SEBI act, 1992. They also do not find

there is violation of regulation 15A, 20, 20A and clause 1, 2, 5 and 7 of the code of conduct

under Regulation 7A of the SEBI (Foreign Institutional Investor) Regulation, 1995 while they

have expressed their views about the order issued under section 11(B) read with section 11(4)

they set aside the impugned order and uphold the appeal on the basis of the fact and

circumstances of the case. SEBI is free to take any action, if it so desire, and if there is a prima

facie case under any of the provisions of the SEBI Act, 1992 and the FII regulation. And there

is no order as to costs.

INVESTMENT CONDITIONS AND RESTRICTIONS

The instruments available for investments to FPIs are broadly in line with the instruments offered

under the FII regime. The total investment by each FPI is restricted to 10% of the issued equity

capital of the company. In case, the same set of ultimate/end beneficial owner(s) invest through

multiple entities, such entities shall be treated as part of the same group and the investment limits

of all such entities shall be clubbed as applicable to a single PFI. A FPI is permitted to invest

only in the following securities in India:-


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Securities in the primary and secondary markets;

Units of scheme floated by domestic mutual funds, collective investment schemes;

Unit of schemes floated by a collective investment scheme;

Derivatives traded on a recognized stock exchange;

Treasury bills and dated governmental securities;

Commercial papers issued by an Indian company;

Rupee denominated credit enhanced bonds;

Security receipts issued by asset reconstruction companies;

Perpetual debt instruments and debt capital instruments, as specified by RBI from time to

time;

Listed and unlisted non-convertible debentures (NCDs)/bonds issued by an Indian

company in the infrastructure sector,

Non-convertible debentures (NCDs) or bonds issued by Non-Banking Financial

Companies (NBFCs) categorised as Infrastructure Finance Companies by RBI;

Rupee denominated bonds or units issued by infrastructure debt funds;

Indian depository receipts, and

Such other instruments specified by SEBI from time to time.


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Additional conditions have been prescribed in the FPI Regulations where a FII or a sub-accounts,

prior to the commencement of these regulations, holds equity shares in a company whose shares

are not listed on any recognized stock exchange, and continue to hold such shares after initial

public offering and listing thereof, such shares shall be subject to lock-in for the same period, if

any, as is applicable to shares held by a foreign direct investor placed in a similar position, under

the policy of GOI relating to foreign direct investment for the time being in force (currently 3

years). An FPI is also permitted to lend or borrow securities in accordance with the framework

specified by SEBI in this regard. Additional conditions have also been prescribed in the FPI

Regulations in respect of investments made in the secondary market. The same, inter alia,

include:

An FPI shall transact in the securities in India by only on the basis of taking/giving

delivery of securities (except for transactions in derivatives; short selling transactions,

etc). Exceptions to this condition may be given under:-

Any transaction in derivatives on a recognized stock exchange

Short selling transactions in accordance with the framework specified by SEBI

Any transaction in securities pursuant to an agreement entered into with the

merchant banker in the process of market making or subscribing to unsubscribed

portion of the issue in accordance with ICDR Regulations.

Any other specified transaction.

Transaction on the stock exchange cannot be carried forward.


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The transaction of business in securities by a FPI must be only through SEBI registered

stock brokers. Exceptions to this condition may be reproduces as under:-

Transactions in Government securities and such other securities falling under the

purview of RBI which shall be carried out in the manner specified by RBI

Sale of securities in response to a letter of offer sent by an acquirer in accordance

with the Takeover Regulations

Sale of securities in response to an offer made by any promoter or acquire in

accordance with Delisting Regulation

Sale of securities in response to an offer by Indian Companies in accordance with

Operative Guidelines for Disinvestment of Shares by Indian Companies in the

overseas market through issue of American Depository Receipts as notified by

GOI and directions issued by RBI from time to time;

Any bid, or acquisition of, securities in response to an offer for disinvestment of

shares made by the Central Government or any State Government;

Any transaction in securities pursuant to an agreement entered into with

merchant banker in the process of market making or subscribing to unsubscribed

portion of the issue in accordance ICDR Regulations;

Any other transaction specified by SEBI


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An FPI shall hold, deliver or cause to be delivered securities only in dematerialized form.

Existing shares held in non-dematerialized form, can be held in non-materialized from, if

such shares cannot be dematerialized.

In respect of investments in the debt securities, the FPIs shall also comply with terms,

conditions or directions, specified or issued by SEBI or RBI, in addition to other

conditions specified in these regulations

Unless approved by SEBI, securities shall be registered in the name of the FPI as a

beneficial owner for the purpose of the Depositories Act, 1996

In cases where the GOI enters into agreements or treaties with other sovereign

Governments and where such agreements or treaties specifically recognize certain entities

to be distinct and separate, SEBI may, during the validity of such agreements or treaties,

recognize them as such, subject to conditions as may be specified by it.

Investment in equity shares of a company by a single FPI or investor group shall be

below 10% of the issued capital of the company. Where the same set of multiple

beneficial owner(s) invest through multiple entities, such entities shall be treated as part

of the same investor group and the investment limits of such entities shall be clubbed at

the investment limit as applicable to a single FPI.

ISSUANCE OF OFFSHORE DERIVATIVE INSTRUMENT

FPIs may issue, subscribe or deal in ODIs, subject to certain conditions. Offshore Derivative

Instruments are issued to persons regulated by appropriate foreign regulatory authority and in


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compliance with KYC (Know Your Clients) norms. However, unregulated broad based funds are

not permitted to issue, subscribe or deal in ODIs such as participatory notes, whether directly or

indirectly. FPIs who fall under Category III are also prohibited from issuing, subscribing or

dealing with Offshore Derivative Instruments. The main task of the FPI is to ensure that any

issue or transfer of ODIs are made only to persons who are regulated by an appropriate foreign

regulatory authority. SEBI needs to be disclosed of the terms, of and parties to ODIs entered into

by the FPI as and when the SEBI may specify. All outstanding ODIs shall be deemed to have

been issued under the corresponding provision of the FPI Regulations.

CASEGOLDMAN SACHS DISPUTE

Goldman Sachs Investment (Mauritius) Ltd. V. The Adjudication Officer, Securities and

Exchange Board of India, [2008] 87 SCL 226 (SAT).

Decided on15/5/2008

Honble Judges-

N.K. Sodhi, J. (presiding officer) Arjun Bhargava, Utpal Bhattacharya, Members

Facts of the case:


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Goldman Sachs Investment (Mauritius) Limited - the appellant herein is a registered sub-

account with the board and Goldman Sachs and co. is the registered FII.

On November 25, 2002, the appellant as a sub-account issued off-shore derivative instruments

(ODIs), among others, to its affiliate namely, Goldman Sachs International Ltd. England with the

shares of Himachal Futuristic Communications Ltd. as the underlying securities.

The affiliate in turn issued ODIs on the same underlying security on a back to back basis to

Magnus Capital Corporation limited (for short Magnus) which is an OCB.

At the time when these ODIs had been issued, the revised format for reporting had not been

prescribed. However, on the issuance of the circular dated August 8, 2003, the appellant was

obliged to submit the one time report indicating the total outstanding off-shore derivatives as on

August 15, 2003 in the prescribed form in Annexure A to the circular.

This report was filed with a forwarding letter dated August 20, 2003. The report was incomplete

and the difficulties experienced by the appellant in furnishing the complete information were

mentioned in the accompanying letter. However, the complete information was furnished to the

Board on August 29, 2003 through e-mail.

It is, thus, clear that in the one time report which was submitted in two parts, the appellant did

not file any undertaking whereas in its fortnightly reports an undertaking in a modified form was

being furnished.

Primary question raised in this case:


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The primary question which was raised in this case was whether the security and exchange board

of India (Board) could ask the foreign Institutional Investor (FIIs) to furnish an undertaking that

they had not dealt in respect of off-shore derivative instrument with Indian Resident, Non-

Resident Indians (NRIs), Person of Indian Origin (PIOs), or Overseas Cooperate bodies (OCBs)

in the absence of a bar on such deals. Further some issues are again raised that are as follows:

Whether the undertaking given by GSIML is false/OR, GSIML violated the declaration

regarding issuance of ODIs;

Whether GSIML violated the provisions of Regulation 20 of FII Regulations;

Whether Regulation 13(1) of FII Regulation is attracted in the instant matter.

Judgment of the case:

The Appellate Tribunal gives its decision in the following words that- the requirement of an

undertaking is opposed to all norms of reason and totally devoid of logic and borders on

absurdity and is arbitrary - When the FIIs and their sub accounts have not been debarred from

dealing in ODIs with Indian residents/ NRIs/ PIOs/ OCBs and many of them would have dealt

with the latter, they could not be asked to furnish the undertaking - Requirement of the

undertaking by FIIs and their sub-accounts could have been appreciated if they had first been

debarred from dealing with the aforesaid persons or in other words, the bar must necessarily

precede the undertaking demanded from the FIIs and their sub-accounts - However, it was


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clarified that no suggestion was made that that the board could not have called upon the FIIs to

report about their activities or furnish to it the information required of them under the

Regulations - It only disapproved the action of the board requiring them to furnish the

undertaking as prescribed for the first time in the revised reporting format in the absence of a

bar prohibiting them from dealing in ODIs with Indian residents/ NRIs/ PIOs/ OCBs .In the

result, the appeal is allowed and the impugned order set aside. The board is directed not to

insist on the undertaking prescribed by the revised reporting format. The appellant will have its

costs which are assessed at Rs. 1 lack.

Designated Depository Participant

It is mandatory for all FPIs to appoint a custodian of securities before making any investments.

The existing qualified designated depository participants and custodians of securities who are

registered or approved by SEBI before the commencement of the FPI Regulations, having

opened QFI accounts as on date of the notifications of these regulations, shall be deemed to have

been granted registration as DDPs under the FPI Regulations. The DDPs are however, subjected

to payment of certain fees. The application for approval to act as a DDP shall be made to SEBI

through the depository in which the application is a participant accompanied by the prescribed

fees. The Designated Depository Participant should inter alia be an Authorized Dealer Category-

1 bank authorized by RBI, a participant and a custodian of securities registered with SEBI, a fit

and proper person based on criteria as specified under the Intermediaries Regulations and should

have multinational presence either through branches or through agency relationships with

intermediaries regulated in their respective home jurisdictions. The applicant also needs to have

systems and procedures to comply with the requirements of FATF Standards, Prevention of


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Money Laundering Act, 2002, and the rules and circulars provided thereunder. The COR granted

to a DDP is permanent unless suspended or cancelled by SEBI or surrendered by the DDP. SEBI

has also issued a Circular that provides operational guidelines to DDPs. They, inter alia, state

that:

Conditional registration to an entity seeking to register itself as a broad based fund under

Category II may be granted, subject to certain prescribed conditions;

A validity period of 180 days is provided in the case of conditional registration;

The procedure for surrender of registration, disinvestment, name change approval,

change in DDP/custodian, etc. have been prescribed.

CONCLUSION-

With the ease in registration requirements and clarity on taxation being brought in for FPIs, the

new FPI regime is likely to boost portfolio investments in India by foreign investors. Granting of

permanent registrations to FPIs shall not require them to approach the DDPs time and again for

the same, thus, providing them a more supportive environment for investment in India.

Meanwhile, with the delegation of work to DDPs, SEBI can now focus on more important issues

at hand requiring its attention and perform its regulatory role more effectively. It can be argued

that the shift to the new regime, for all classes of investors that have been merged, shall be a

comfortable one particularly because a buffer period has been given to them to operate without


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needing them to immediately comply with the formalities and process for conversion to and

operation as FPIs.

Therefore the new FPI regulations are put in place to make an easier registration process and

operating framework for overseas entities seeking to invest in Indian capital market. Securities

and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, which repeals the

SEBI (FII) Regulations, 1995, significantly revises the regulation of foreign portfolio

investments into India. These regulations rationalize the classification of investors, KYC

requirements and investment conditions.

On the key issues which foreign investors currently deal with, viz. ambiguity on the broad

based criteria, eligibility to issue/subscribe to offshore derivative instruments and clubbing of

investment limit, SEBI seems to have revisited the current position which may impact the

industry and in future SEBI might also need to issue clarifications with respect to compliance of

certain aspects of the FPI Regulations (such as revised investment caps, Participatory Note

structures, investment in unlisted shares etc.) by existing FIIs.

Presently SEBI approved Designated Depository Participants have already commenced granting

registration to FPIs under the new framework. The migration to the FPI regime has thus been

effected in a smooth manner.

Thus the operation of the Foreign Portfolio Investment is, now, easy made by the SEBI. And this

plays very crucial role in the investment done by the foreign and the bars are made by the SEBI

to just cover the all inappropriate things.


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BIBLIOGRAPHY

Statute

1. Securities and Exchange Board of India, 1995

Cases

1. USB Securities Asia Ltd v Securities & Exchange Board of India (2005) 6 Comp LJ 64 (SAT)

2. Goldman Sachs Investments (Mauritius) Ltd v The Adjudicating Officer, Securities and

Exchange Board of India,[2008] 87 SCL 226 (SAT)

Articles


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1. The Impact of Changing Foreign Portfolio Regulations in India, Citi Online Academy,

February 25, 2014

2. EY Regulatory Alert, Securities and Exchange Board of India notifies regulations to ease and

rationalize Foreign Portfolio Investments, 14 January 2014.

3. Deloitte India Tax and Regulatory, Regulatory Alert Tracking Change, 14 January 2014

4. Sharing Insights, PWC News Alert 9 January 2014.

5. Offshore Derivative Instruments: An Investigation into Tax Related Aspect, Nishith Desai

Associates, February 2013

6. ISMR, Foreign Investment in India

7. Finance Maps of India-Offshore Derivatives in India

8. The Hindu Business Line: SEBI tightens norms for issue of participatory notes, New Delhi,

January 13

9. Financial Chronicle: SEBI rings in cooler conditions for foreign portfolio investors, By PTI,

January 07 2014, Mumbai

10. CIBC Mellon: India-SEBI Foreign Portfolio Investors (FPI) Regulations 2014, January 14

11. AUBSP: Reporting of Offshore Derivative Instruments and Participatory Notes activity,

Suresh Prasad

12. Business Standard: RBIs opposition to P-Notes works, finally, October 19, 2007


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SUBMITTED BY-RUCHIKA SINGH TEK CHAND MEENA AND VIVEK KUMAR MISHRA

foreign portfolio investment operational part

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