Another Effort at Harmonizing Foreign Portfolio Investment

In 2010,
the Working Group on Foreign Investment in India made an important set of recommendations
in relation to the consolidation of various types of investment routes for
foreign investors making portfolio investments into the Indian markets. The
idea was to do away with the various routes presently existing, such as for
non-resident Indians (NRIs), foreign institutional investors (FIIs) and foreign
venture capital investors (FVCIs). By bringing all these dispersed schemes
under one consolidated category of qualified foreign investors (QFIs), the investment
route was to be harmonized thereby creating a much simplified regime. What
happened thereafter was interesting. The Government introduced the QFI scheme,
but not in the manner that the Working Group envisaged. The QFI route was introduced
in addition to all the existing
routes available thereby creating an additional category, and not by consolidating
all routes into one. The efforts resulted in greater fragmentation of the
regime rather than a consolidation.
Now, the
mantra of consolidation and harmonization of the portfolio investment route is
back in the reckoning, this time with SEBI. In a board
meeting
held yesterday, SEBI has announed its decision to prepared draft
guidelines on the lines recommended by the Working Group to create a uniform
regime for various types of portfolio investors. While this is a welcome move
in terms of simplifying the legal regime, since this involves aspects of
foreign investment, it will also require coordination with the Government of
India and the Reserve Bank of India so that various foreign investment norms
are brought in line with the proposed SEBI guidelines as well.

Minimum Public Shareholding: Among other decisions taken at the board meeting, SEBI has indicated
its intention to set up an action plan and processes in conjunction with market
participants for ensuring compliance with section 19AA of the Securities Contracts
(Regulation) Act, 1956. A formula has also been indicated for defining “shares
held by the public” in a company, wherein capital issued by a company outside
India (which presumably refers to ADRs/GDRs, etc.) will not be taken into
consideration either in the numerator or denominator.

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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