Budget 2013: Foreign Portfolio Investment

The Finance Minister has sought to
streamline the currently complex regime for foreign portfolio investment. The Budget
speech
notes:
– There are
many categories of foreign portfolio investors such as FIIs, sub-accounts, QFIs
etc. and there are also different avenues and procedures for them. Designated
depository participants, authorised by SEBI, will now be free to register
different classes of portfolio investors, subject to compliance with KYC
guidelines.
– SEBI will
simplify the procedures and prescribe uniform registration and other norms for
entry of foreign portfolio investors. SEBI will converge the different KYC
norms and adopt a risk-based approach to KYC to make it easier for foreign
investors such as central banks, sovereign wealth funds, university funds,
pension funds etc. to invest in India.
– In order to
remove the ambiguity that prevails on what is Foreign Direct Investment (FDI)
and what is Foreign Institutional Investment (FII), I propose to follow the
international practice and lay down a broad principle that, where an investor
has a stake of 10 percent or less in a company, it will be treated as FII and,
where an investor has a stake of more than 10 percent, it will be treated as
FDI. A committee will be constituted to examine the application of the
principle and to work out the details expeditiously.
This approach is based on the
recommendation of the Working
Group
that issued its report back in 2010. However, at that time it was not
implemented in the manner intended. While the objective was to streamline the various
available schemes for foreign portfolio investment, an additional category of
qualified foreign investors (QFIs) was created which failed to gain momentum
and added to the slew of options.

On this occasion, SEBI has
already
initiated
the streamlining process last year, and with the Budget announcement the other
regulators such as the RBI would also be expected to bring their procedures in
line with the objective. This will hopefully address some of the concerns
relating to foreign portfolio investment and at least partially avoid the
exportation of capital markets discussed in the
post
earlier today.

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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