foreign portfolio investors

Decisions taken at the SEBI board meeting held on 21st August, 2019

Review of SEBI (Foreign Portfolio Investors) Regulations

The Board considered the recommendations of the working group constituted for reviewing the SEBI (Foreign Portfolio Investors) Regulations, 2014 and approved the proposed new set of Regulations.

The key focus of the proposed Regulations is to simplify and rationalize the existing regulatory framework for foreign portfolio investors (FPIs) in terms of easing the operational constraints and compliance requirements. 57 circulars and 183 FAQs pertaining to FPIs issued over the years have been merged into new regulations and a single circular. Some of the key aspects of revised regulations include:

1. To simplify and expedite the registration process and to bring about ease in compliance requirements for FPIs, the broad based eligibility criteria for institutional foreign investors has been done away with.

2. On reviewing the risk profiling of the FPIs, it is decided that the FPIs may be re-categorized into two categories - Category I and II, instead of the present requirement of three categories.

3. Registration for multiple investment manager (MIM) structures has been simplified.

4. Considering that the central banks are relatively long term, low risk investors directly/ indirectly managed by the Government, the central banks that are not the members of BIS (Bank for International Settlement) shall also be eligible for FPI registration.

5. The entities established in the international financial services center (IFSC) be deemed to have met the jurisdiction criteria for FPIs.

6. Documentation requirements for KYC have been simplified.

7. FPIs shall be permitted for off-market transfer of securities which are unlisted, suspended or illiquid, to a domestic or foreign investor.

8. Offshore funds floated by Indian Mutual Funds shall now be permitted to invest in India after obtaining registration as FPI.

9. The requirements for issuance and subscription of Offshore Derivative Instruments (ODIs) have been rationalized.

foreign portfolio investors

SEBI has issued a circular dated 12th March, 2019 that all investments made by foreign portfolio investors in the debt markets shall henceforth be guided by RBI vide their guidelines on the subject. So FPI shall comply with the guidelines and instructions by RBI on this subject from time to time. But any non compliance with RBI instructions shall attract as per SEBI guidelines.

RBI has recently liberalised certain conditions for investment by FPIs in the debt markets and given more liberal limits thereto.

So does makes sense for the regulators to co-ordinate with each other and avoid duplication of regulations.

A copy of the SEBI circular can be found here

Hedging of exchange rate risks

RBI has vide its circular dated 1st March, 2019 made operational guidelines for hedging of exchange rate risk by foreign portfolio investors using the VRR route for their debt investments.

Hedging of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary Retention Route

Purpose: To hedge the exposure to exchange rate risk on account of investments made under the Voluntary Retention Route (VRR)

Products: Forwards, options, cost reduction structures and swaps with Rupee as one of the currencies

Operational Guidelines, Terms and Conditions:

i. Authorised dealers may offer derivative contracts using any of the aforementioned products to eligible users under VRR or to its central treasury (of the group and being a group entity). Authorised dealers shall ensure that:

1. The FPI has an exposure to exchange rate risk on account of investments made under VRR.
2. The notional and tenor of the contract does not exceed the value and tenor of the exposure.
3. The same exposure has not been hedged with any other authorised dealer or on the exchange.
4. In cases where the value of the exposure falls below the notional of the derivative, the derivative should be suitably adjusted unless such divergence has occurred on account of change in market value of the exposure, in which case the FPI may, at its discretion, continue with the derivative contract till its original maturity.

ii. Authorised dealers shall allow FPIs to freely cancel and rebook the derivative contracts.

iii. Authorised Dealer shall ensure that all payables incidental to the hedge are met by the FPI out of repatriable funds and/or inward remittance through normal banking channels.

Copy of this said circular can be found here

Voluntary Retention Route

RBI circular dated 1st March, 2019 on allowing FPIs to invest in debt through the Voluntary Retention Route.

Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment

Introduction

The Reserve Bank, in consultation with the Government of India and Securities and Exchange Board of India (SEBI), introduces a separate channel, called the ‘Voluntary Retention Route’ (VRR), to enable FPIs to invest in debt markets in India. Broadly, investments through the Route will be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period. Participation through this Route will be entirely voluntary. The features of the Route are explained below in detail.

2. Definitions

i. ‘Committed Portfolio Size’ (CPS), for an FPI, shall mean the amount allotted to that FPI.

ii. ‘General Investment Limit’, for any one of the three categories, viz., Central Government Securities, State Development Loans or Corporate Debt Instruments, shall mean FPI investment limits announced for these categories under the Medium Term Framework, in terms of A.P. (DIR Series) Circular No. 22 dated April 6, 2018, as modified from time to time.

iii. ‘Minor violations’ shall mean violations that are, in the considered opinion of the custodians, unintentional, temporary in nature or have occurred on account of reasons beyond the control of FPIs, and in all cases are corrected on detection.

iv. ‘Related FPIs’ shall mean ‘investor group’ as defined in Regulation 23(3) of SEBI (Foreign Portfolio Investors) Regulations, 2014.

v. ‘Repo’ shall have the same meaning as defined in Section 45U (c) of RBI Act, 1934; and for the purpose of this regulation excludes repo conducted under the Liquidity Adjustment Facility and the Marginal Standing Facility.

vi. ‘Retention Period’ shall mean the time period that an FPI voluntarily commits for retaining the CPS in India.

vii. ‘Reverse Repo’ shall have the same meaning as defined in Section 45U (d) of RBI Act, 1934; and for the purpose of this regulation excludes reverse repo conducted under the Liquidity Adjustment Facility and the Marginal Standing Facility.

viii. ‘VRR-Corp’ shall mean Voluntary Retention Route for FPI investment in Corporate Debt Instruments.

ix. ‘VRR-Govt’ shall mean Voluntary Retention Route for FPI investment in Government Securities.

3. Eligible investors

Any FPI registered with SEBI is eligible to participate through this Route. Participation through this Route shall be voluntary.

4. Eligible instruments

1. Under VRR-Govt, FPIs will be eligible to invest in any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs). Under VRR-Corp, FPIs may invest in any instrument listed under Schedule 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 notified vide Notification No. FEMA.20(R)/2017-RB dated November 07, 2017, other than those specified at 1A(a) and 1A(d) of that Schedule.
2. Repo transactions, and reverse repo transactions.

5. Features

a. Investment through this Route shall be in addition to the General Investment Limit. Investment under this route shall be capped at Rs.40,000 crore for VRR-Govt and Rs.35,000 crore for VRR- Corp per annum, or such higher amount, as may be decided by the Reserve Bank from time to time. The investment limit shall be released in one or more tranches.

b. Allocation of investment amount to FPIs under this Route shall be made on tap or through auctions. Details of the auction mechanism are given in Appendix.

c. The mode of allotment, allocation to VRR-Govt and VRR-Corp categories and the minimum retention period shall be announced by the Reserve Bank ahead of allotment.

d. No FPI (including its related FPIs) shall be allotted an investment limit greater than 50% of the amount offered for each allotment by tap or auction in case there is a demand for more than 100% of amount offered.

e. The minimum retention period shall be three years, or as decided by RBI for each allotment by tap or auction.

f. FPIs shall invest the amount allocated, called the Committed Portfolio Size (CPS) in the relevant debt instruments and remain invested at all times during the voluntary retention period, subject to the following relaxations:

1. The minimum investment of an FPI during the retention period shall be 75% of the CPS (The flexibility for modulating investments between 75%-100% of CPS is intended to enable FPIs to adjust their portfolio size as per their investment philosophy).
2. The required investment amount shall be adhered to on an end-of-day basis. For this purpose, investment shall include cash holdings in the Rupee accounts used for this Route.

g. Amounts of investment shall be reckoned in terms of the face value of securities.

6. Management of portfolio

1. Successful allottees are required to invest 25% of their CPS within one month and the remaining amount within three months from the date of allotment. The retention period will commence from the date of allotment of limit.
2. Prior to the end of the committed retention period, an FPI, if it so desires, may opt to continue investments under this Route for an additional identical retention period. In that case, it shall convey this decision to its custodian.
3. In case an FPI decides not to continue under VRR at the end of the retention period, FPI may liquidate its portfolio and exit, or it may shift its investments to the ‘General Investment Limit’. This shifting would be subject to availability of limit under the ‘General Investment Limit’.
4. FPIs that wish to liquidate their investments under the Route prior to the end of the retention period may do so by selling their investments to another FPI or FPIs. However, the FPI (or FPIs) buying such investment shall abide by all the terms and conditions applicable to the selling FPI under the Route.
5. Any violation by FPIs shall be subjected to regulatory action as determined by SEBI. FPIs are permitted, with the approval of the custodian, to regularize minor violations immediately upon notice, and in any case, within five working days of the violation. Custodians shall report all non-minor violations as well as minor violations that have not been regularised to SEBI.

7. Other relaxations

1. Investments made through the Route shall not be subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to corporate bonds as specified in paragraphs 4(b), (e) and (f) respectively of A.P. (DIR Series) Circular No. 31 dated June 15, 2018.
2. Income from investments through the Route may be reinvested at the discretion of the FPI. Such investments will be permitted even in excess of the CPS.

8. Access to other facilities

1. FPIs investing through the Route will be eligible to participate in repos for their cash management, provided that the amount borrowed or lent under repo shall not exceed 10% of their investment under VRR.
2. FPIs investing under this route shall be eligible to participate in any currency or interest rate derivative instrument, OTC or exchange traded, to manage their interest rate risk or currency risk.

9. Other operational aspects

1. Utilisation of limits and adherence to other requirements of this Route shall be the responsibility of both the FPI and its custodian.
2. Custodians shall not permit any repatriation from the cash accounts of an FPI, if such transaction leads to the FPI’s assets falling below the minimum stipulated level of 75% of CPS during the retention period.
3. Custodians shall have in place appropriate legal documentation with FPIs that enables them (custodians) to ensure that regulations under VRR are adhered to.
4. FPIs shall open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. All fund flows relating to investment through the Route shall reflect in such account(s).
5. FPIs shall also open a separate security account for holding debt securities under this Route.

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Appendix

Auction process for allocation of investment amount under VRR

The auction process for allotment of investment amounts under VRR shall be as under:

a. An FPI shall bid two variables - the amount it proposes to invest and the retention period of that investment, which shall not be less than the minimum retention period applicable for that auction.

b. FPIs are permitted to place multiple bids.

c. The criterion for allocation under each auction shall be the retention period bid in the auction.

d. Bids will be accepted in descending order of retention period, the highest first, until the amounts of accepted bids add up to the auction amount.

e. Allotment at margin (i.e., at the lowest retention period accepted), in case the amount bid at margin is more than the amount available for allotment, shall be as below:

1. The marginal bid shall be allocated partially such that the total acceptance amount matches the auction amount.
2. In case there are more than one marginal bids, allocation shall be made to the bid with the largest amount, and then in descending order of amount bid until the acceptance amount matches the auction amount.
3. In case the amount offered is the same for two or more marginal bids, the amount will be allocated equally.

f. If an FPI has been allotted multiple bids in an auction, the CPS shall be reckoned for each bid separately.

g. FPI which has got CPS allocated under an auction will be eligible to participate in subsequent auction as well.

The RBI circular can be found here

Monitoring of foreign investment limits in listed Indian companies

SEBI circular dated April, 5, 2018 follows:

1. Foreign Investment in India is regulated in terms of clause (b) of sub-section 3 of section 6 and section 47 of the Foreign Exchange Management Act, 1999 (FEMA) read with Foreign Exchange Management (Transfer or Issue of a Security by a Person resident Outside India) Regulations, 2017 issued vide Notification No. FEMA 20(R)/2017-RB dated November 7, 2017. FEMA prescribes the various foreign investment limits in listed Indian companies. These include the aggregate FPI limit, the aggregate NRI limit and the sectoral cap. The RBI Master Direction (FED Master Direction No. 11/2017-18) dated January 04, 2018 provides a compilation of the instructions issued on Foreign Investment in India and its related aspects under FEMA.    

2. As per FEMA, the onus of compliance with the various foreign investment limits rests on the Indian company. In order to facilitate the listed Indian companies to ensure compliance with the various foreign investment limits, SEBI in consultation with RBI has decided to put in place a new system for monitoring the foreign investment limits. The architecture of the new system has been explained in Annexure A. 

3. The depositories (NSDL and CDSL) shall put in place the necessary infrastructure and IT systems for operationalizing the monitoring mechanism described at Annexure A. The Stock Exchanges (BSE, NSE and MSEI) shall also put in place the necessary infrastructure and IT systems for disseminating information on the available investment headroom in respect of listed Indian companies. 

4. The depositories shall issue the necessary circulars and guidelines for collecting data on foreign investment from listed companies. The system for collecting this data from the companies shall go live on the date of the issuance of this circular. The companies shall provide the necessary data (details of which have been mentioned in Annexure A) to the depositories latest by May 15, 2018 (amended vide SEBI circular dated 27th April, 2018). 

5. The new system for monitoring foreign investment limits in listed Indian companies shall be made operational on May 18, 2018 (amended vide SEBI circular dated 27th April, 2018). The existing mechanism for monitoring the foreign investment limits shall be done away with once the new system is operationalized. RBI shall issue the necessary guidelines in this regard. 

Annexure A

Architecture of the System for Monitoring Foreign Investment Limits in listed Indian companies

Housing of the System
1. The system for monitoring the foreign investment limits in listed Indian companies shall be implemented and housed at the depositories (NSDL and CDSL).

Designated Depository

2. A Designated Depository is a depository which has been appointed by an Indian company to facilitate the monitoring of the foreign investment limits of that company.  As defined at Regulation 2(xxiii) of FEMA, the term ‘Indian company’ means a company incorporated in India and registered under the Companies Act, 2013.

3. The Designated Depository shall act as a lead depository and the other depository shall act as a feed depository. 

Company Master

4. The company shall appoint any one depository as its Designated Depository for the purpose of monitoring the foreign investment limit. 

5. The stock exchanges (BSE, NSE and MSEI) shall provide the data on the paid-up equity capital of an Indian company to its Designated Depository. This data shall include the paid-up equity capital of the company on a fully diluted basis. As defined at Regulation 2(xvii) of FEMA, the term “fully diluted basis” means the total number of shares that would be outstanding if all possible sources of conversion are exercised.

6. The depositories shall provide an interface wherein the company shall provide the following information to its Designated Depository:

i. Company Identification Number (CIN)
ii. Name
iii. Date of incorporation
iv. PAN number
v. Applicable Sector
vi. Applicable Sectoral Cap
vii. Permissible Aggregate Limit for investment by FPIs
viii. Permissible Aggregate Limit for investment by NRIs
ix. Details of shares held by FPI, NRIs and other foreign investors, on repatriable basis, in demat as well as in physical form
x. Details of indirect foreign investment which are held in both demat and physical form
xi. Details of demat accounts of Indian companies making indirect foreign investment in the capital of the company
xii. Whether the Indian company that has total foreign investment in it , is either not owned and not controlled by resident Indian Citizens or is owned or controlled by person’s resident outside India (Yes or No)
xiii. ISIN-wise details of the downstream investment in other Indian companies

The information provided by the companies shall be stored in a Company Master database. The Designated Depository, if required, may seek additional information from the company for the purpose of monitoring the foreign investment limits. The companies shall ensure that in case of any corporate action, the necessary modification is reflected immediately in the Company Master database.

7. In the event of any change in any of the details pertaining to the company, such as increase/decrease of the aggregate FPI/NRI limits or the sectoral cap or a change of the sector of the company, etc. the company shall inform such changes along with the supporting documentation to its Designated Depository. Such documentation may include:

i. Board of Directors resolution approving the increase/decrease
ii. General body resolution approving the increase/decrease
iii. Company Secretary certificate for compliance with FEMA, 1999


Reporting of trades

8. At present, as per SEBI guidelines, the custodians are reporting confirmed trades of their FPI clients to the depositories on a T+1 basis. This reporting shall continue and the data shall be the basis of calculating FPI investments/holding in Indian companies. 

9. With respect to NRI (repatriable) trades, Authorized Dealer (AD) Banks shall report the transactions of their NRI clients to the depositories. The AD Banks shall be guided by the circulars issued by RBI in this regard. 

Activation of a Red Flag Alert 

10. The monitoring of the foreign investment limits shall be based on the paid-up equity capital of the company on a fully diluted basis to ensure that all foreign investments are in compliance with the foreign investment limits. 11. A red flag shall be activated whenever the foreign investment within 3% or less than 3% of the aggregate NRI/FPI limits or the sectoral cap. This shall be done as follows :

Aggregate NRI investment limit in the company

11.1. The system shall calculate the percentage of NRI holdings in the company and the investment headroom available as at the end of the day with respect to the aggregate NRI investment limit

11.2. If the available headroom is 3% or less than 3% of the aggregate NRI investment limit, a red flag shall be activated for that company.

11.3. Thereafter, the depositories and exchanges shall display the available investment headroom, in terms of available shares, for all companies for which the red flag has been activated, on their respective websites.

11.4. The data on the available investment headroom shall be updated on a daily end-of-day basis as long as the red flag is activated. 

Aggregate FPI investment limit of the company

11.5. The system shall calculate the percentage of FPI holding in the company and the investment headroom available as at the end of the day with respect to the aggregate FPI investment limit

11.6. If the available headroom is 3% or less than 3% of the aggregate FPI investment limit, a red flag shall be activated for that company.

11.7. Thereafter, the depositories and exchanges shall display the available investment headroom, in terms of available shares, for all companies for which the red flag has been activated, on their respective websites.

11.8. The data on the available investment headroom shall be updated on a daily end-of-day basis as long as the red flag is activated. 

Sectoral cap of the company

11.9. The system shall calculate the total foreign investment in the company by adding the aggregate NRI investment on the stock exchange, the aggregate FPI investment in the company and other foreign investment as provided by the company in the company master.

11.10. If the total foreign investment in a company is within 3% or less than 3% of the sectoral cap, then a red flag shall be activated for that company.

11.11. Thereafter, the depositories and exchanges shall display the available investment headroom, in terms of available shares, for all companies for which the red flag has been activated, on their respective websites.

11.12. The data on the available investment headroom shall be updated on a daily end-of-day basis as long as the red flag is activated.

12. The depositories shall inform the exchanges about the activation of the red flag for the identified scrip. The exchanges shall issue the necessary circulars/public notifications on their respective websites. Once a red flag has been activated for a given scrip, the foreign investors shall take a conscious decision to trade in the shares of the scrip, with a clear understanding that in the event of a breach of the aggregate NRI/FPI limits or the sectoral cap, the foreign investors shall be liable to disinvest the excess holding within five trading days from the date of settlement of the trades.

Breach of foreign investment limits

13. Once the aggregate NRI/FPI investment limits or the sectoral cap for a given company have been breached, the depositories shall inform the exchanges about the breach. The exchanges shall issue the necessary circulars/public notifications on their respective websites and shall halt all further purchases by :

13.1. FPIs, if the aggregate FPI limit is breached
13.2. NRIs, if the aggregate NRI limit is breached

13.3. All foreign investors, if the sectoral cap is breached

14. In the event of a breach of the sectoral cap/aggregate FPI limit/aggregate NRI limit, the foreign investors shall divest their excess holding within 5 trading days from the date of settlement of the trades, by selling shares only to domestic investors.

Method of disinvestment

15. The proportionate disinvestment methodology shall be followed for disinvestment of the excess shares so as to bring the foreign investment in a company within permissible limits. In this method, depending on the limit being breached, the disinvestment of the breached quantity shall be uniformly spread across all foreign Investors/FPIs/NRIs which are net buyers of the shares of the scrip on the day of the breach.  The foreign investors are required to disinvest the excess quantity by selling them only to domestic investors, within 5 trading days of the date of settlement of the trades that caused the breach. 

16. This method has been illustrated with the help of an example provided below. 

 
 17. As can be observed from the above table, the foreign investors/FPIs/NRIs which are required to disinvest shall be identified and shall be informed of the excess quantity that they are required to disinvest. 

18. In the case of FPIs which have been identified for disinvestment of excess holding, the depositories shall issue the necessary instructions to the custodians of these FPIs for disinvestment of the excess holding within 5 trading days of the date of settlement of the trades. 

19. In the case of NRIs which have been identified for disinvestment of excess holding, the depositories shall issue the necessary instructions to the Authorized Dealer (AD) Banks for disinvestment of the excess holding within 5 trading days of the date of settlement of the trades.

20. The depositories shall utilize the FPI trade data provided by the custodians, post custodial confirmation, on T+1 day, where T is the trade date.  The breach of investment limits (if any) shall be detected at the end of T+1 day and therefore, the announcement pertaining to the breach shall be made at the end of T+1 day. The foreign investors who have purchased the shares of the scrip during the trading hours on T+1 day shall also be given a time period of 5 trading days from the date of settlement of such trades, to disinvest the holding accruing from the aforesaid purchase trades. In other words, the purchase trades of such foreign investors which have taken place of T+1 day, shall be settled on T+3 day and thereafter a time period from T+4 day to T+8 day shall be available to them to disinvest their entire holding arising from purchases on T+1 day.

21. If T+1 is a settlement holiday, then the custodial confirmation of the trade executed on T day shall be done on T+2 day and the subsequent settlement of the trade on T+3 day. In such a 22. A table summarizing the breach-disinvestment scenario is given below 

 22. A table summarizing the breach-disinvestment scenario is given below

 

23. In the event the foreign shareholding in a company comes within permissible limit during the time period for disinvestment, on account of sale by other FPI or other group of FPIs, the original FPIs, which have been advised to disinvest, would still have to do so within the disinvestment time period, irrespective of the fresh availability of an investment headroom during the disinvestment time period.

24. There shall be no annulment of the trades which have been executed on the trading platform of the stock exchanges and which are in breach of the sectoral caps/aggregate FPI limits/aggregate NRI limits. Failure to disinvest within 5 trading days
25. If a breach of the investment limits has taken place on account of the FPIs and the identified FPIs have failed to disinvest within 5 trading days, then necessary action shall be taken by SEBI against the FPIs. 

Fees

26. The Designated Depository shall levy reasonable fee/charges on the company towards development, ongoing maintenance and monitoring costs at an agreed upon frequency.

Investment limits of foreign govt. in Indian scrips

SEBI circular dated 10th April, 2018 on this subject. Gist of the circular follows:

1.  SEBI has been monitoring investment by foreign Governments and their related entities viz. foreign central banks, sovereign wealth funds and foreign Governmental agencies registered as foreign portfolio investors (hereinafter referred to as FPIs) in India. Since various stakeholders have been seeking guidance on clubbing of investment limits to be applied to foreign Government/ its related entities, the following clarifications are issued:  

a. What is the investment limit for foreign Government/ foreign Government related entities registered as Foreign Portfolio Investors (FPI)?

Reply:  The purchase of equity shares of each company by a single FPI or an investor group shall be below ten percent of the total paid up capital of the company. [Ref. Regulation 21(7) of FPI Regulations].

b. What is an investor group?

Reply:  In case, same set of beneficial owners are constituents of two or more FPIs and such investor(s) have a common beneficial ownership of more than 50% in those FPIs, all such FPIs will be treated as forming part of an investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio investor. [Ref. Regulation 23(3) of FPI Regulations and FAQ 58].

c. How to ascertain whether an FPI is forming part of any investor group?

Reply:  The designated depository participant engaged by an applicant seeking registration as FPI shall ascertain at the time of granting registration and whenever applicable, whether the applicant forms part of any investor group. [Ref. Regulation 32(2)(a) of FPI Regulations].

Further, at para 2.2 in the Form A of first schedule, the applicant seeking registration as FPI is required to furnish information regarding foreign investor group. Accordingly, it is the prime responsibility and obligation of the FPI to disclose the information with regard to investor group.

d. How is the beneficial ownership of foreign Government entities/ its related entities determined for the purpose of clubbing of investment limit?

Reply: The beneficial owner (BO) of foreign Government entities/ its related entities shall be determined in accordance with Rule 9 of Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (hereinafter referred to as PMLA Rules).The said PMLA Rules provide for identification of BO on the basis of two methodologies namely (a) controlling ownership interest (also termed as ownership or entitlement) and (b) control in respect of entities having company or trust structure. In respect of partnership firms and unincorporated associations, ownership or entitlement is basis for identification of BO.

e. Whether two or more foreign Government related entities from the same jurisdiction will individually be permitted to acquire equity shares in an  Indian company up to the prescribed limit of 10%?

Reply:   In case the same set of beneficial owner(s) invest through multiple entities, such entities shall be treated as part of same investor group and the investment limits of all such entities shall be clubbed as applicable to a single FPI. [Ref. Regulation 23(3) of FPI Regulations].

Accordingly, the combined holding of all foreign Government/ its related entities from the same jurisdiction shall be below ten percent of the total paid up capital of the company.

However, in cases where Government of India 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. [Ref. Regulation 21(9) of FPI Regulations].

 f. How will the investment by a Foreign Government Agency be treated?
  
 Reply: Foreign Government Agency is an arm/ department/ body corporate of Government or is set up by a statute or is majority (i.e. 50% or more) owned by the Government of a foreign country and has been included under “Category I Foreign portfolio investors”. [Ref. Regulation 5(a) of FPI Regulations].

The investment by foreign Government agencies shall be clubbed with the investment by the foreign Government/ its related entities for the purpose of calculation of 10% limit for FPI investments in a single company, if they form part of an investor group.

g. Whether any investment by World bank group entity viz. IBRD, IDA, MIGA and IFC should be clubbed with the investment from a foreign Government having ownership in such World bank group entity?

Reply: Government of India, vide letter No. 10/06/2010-ECB dated January 06, 2016 has exempted World Bank Group viz.  IBRD, IDA, MIGA and IFC from clubbing of the investment limits for the purpose of application of 10% limit for FPI investments in a single company.

h. Where Provinces/States of some countries with federal structure have set up their separate investment funds with distinct beneficial ownership constituted with objectives suitable for their respective provinces, such funds not only have separate source of financing but also have no management, administrative or statutory commonality. Kindly inform whether investments by these foreign Government entities shall be clubbed?  

Reply:  The investment by foreign Government/ its related entities from provinces/ states of countries with federal structure shall not be clubbed if the said foreign entities have different BO identified in accordance with PMLA Rules.  

i. How will the foreign Government/ its related entities know the available limit for investment, to avoid breach of the limit?

Reply:  The custodian of securities reports the holdings of FPIs/ investor groups to depositories who monitor the investment limits. As such, NSDL is in ready possession of aggregate holdings of FPIs/ investor groups in any particular scrip. [Ref. Regulation 26(2)(d) of FPI Regulations].To this effect, SEBI, vide communication dated November 02, 2017 has already advised DDPs/ custodians of securities to approach NSDL to get information regarding aggregate percentage holdings of the group entities on whose behalf they are acting in any particular company before making investment decisions. SEBI has no objection to the said arrangement for sharing of data.

j. What if the investment by foreign Government/ its related entities cause breach of the permissible limit?

Reply:  The FPIs investing in breach of the prescribed limit shall divest their holdings within 5 trading days from the date of settlement of the trades causing the breach. Alternatively, the investment by such FPIs shall be considered as investment under Foreign Direct Investment (FDI) at the FPI’s option. However, the FPIs need to immediately inform of such option to SEBI & RBI, since they cannot hold equity investments in a particular company under FPI and FDI route, simultaneously.     2. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.