The Securities and Exchange Board of India (“SEBI”) has issued a circular dated April 15, 2010 clarifying its stand on broad-based criteria for registration as foreign institutional investors (“FIIs”). See:

SEBI has clarified that if an entity has a feature of its structure, multiple classes of investors and multiple pools of investments within the same entity, each such pool ought to comply with broad-based criteria prescribed by SEBI in its regulations for registration of FIIs. Existing FIIs have been given time to become compliant with such a requirement by September 30, 2010.

The move is yet another step towards to ensuring that the FII framework in India is available only for genuinely institutional investors and not for individuals and entities that are not genuinely institutional in character.

To be considered as being broad-based, SEBI has prescribes a minimum number of investors with no investor exceeding a specified percentage of the assets under management. These parameters have been revised from time to time, and currently a single investor is allowed to account for upto 49% of the assets (earlier the requirement was to have at least 20 investors with no investor accounting for more than 10% of the assets).

With a multi-class vehicle it was possible for an entity that had one class of shares that featured a broad-based character, but other classes of investors that were not broad-based. An assessment of the assets of a multi-class entity claiming to be broad-based could result in the real picture not in fact being broad-based, with individuals and their companies riding piggyback on one class of shares that could be regarded as being broad based. The latest move addresses the possibility for such a sham.

The development could lead to privately-banked Indian money being routed back into India having to struggle a bit more in its entry to the Indian market. Such money would have to find company to make itself broad-based – therefore, even if this move will not prevent such money flowing in, it would make it more difficult for it to flow back into India.

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