SWFs as FIIs; Other Amendments to FII Regulations

SEBI has announced a fairly detailed set of amendments to the SEBI (Foreign Institutional Investors) Regulations, 1995.

One of the key amendments relates to the recognition of sovereign wealth funds (SWFs) as a category of investors eligible to invest into the Indian markets as FIIs. This marks a significant move because it makes clear the Indian regulators’ policy approach towards SWFs in the Indian markets. It is also remarkable in a sense because several other countries are yet undecided as to their precise policy of regulating SWFs. The registration of SWFs with SEBI as FIIs would introduce transparency as they would be required to submit the requisite information to SEBI regarding their organisation and operations both at the time of registration and thereafter on a continuing basis. This would help overcome one of the key criticisms of SWFs that they are relatively opaque to the outside world. Further, limitations on FII investments in Indian companies such as the fact that they cannot invest more than 10% in a single company would operate as checks and balances against assertion of excessive influence by SWFs in the Indian marketplace.

However, the current policy pronouncement also leaves some matters open for interpretation. For instance, there seems to be nothing that requires SWFs to invest only through the FII route as a mandatory matter. This is only an option available to SWFs and they may possibly continue to invest under the foreign direct investment (FDI) route otherwise available to foreign investors, in which case they may not be subject to the 10% cap on investment in single companies and other transparency requirements. This dual regime available to SWF (i.e. both the FII route as well as the FDI route) may still leave room for ambiguity and interpretation, and hence a clarification on these matters would be most desirable.

Apart from enabling SWFs to invest as FIIs, the new amendments bring about some further changes to the FII Regulations, which are as follows (quoted from the SEBI circular):

* The policy measures on Offshore Derivative Instruments (Participatory Notes) and changes to the registration criteria specified in SEBI Press Release dated October 25, 2007 have been incorporated in the regulations.

* In order to streamline the process of registration, the Application Forms for grant of registration as a FII and Sub Account have been modified.

* An asset management company, investment manager or advisor or an institutional portfolio manager set up and/ or owned by non resident Indians (NRIs) shall be eligible to be registered as FII subject to the condition that they shall not invest their proprietary funds. This has been enabled by suitable modification to Explanation II under Regulation 13 of the said regulations.

* The type of securities in which FIIs are permitted to invest has been widened to include schemes floated by a Collective Investment Scheme.

Some press reports are available here: The Economic Times, IndianExpress.com.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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