SEBI (Foreign Portfolio Investors) Regulations, 2019, and the Foreign Exchange Management Act

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Key terms in this chapter

Approvals required for transfers

Transfer of shares from a non-resident to a resident other than under SEBI regulations, and where the FEMA pricing guidelines are not met, requires the prior approval of the Reserve Bank of India. Prior approval of the Reserve Bank is also required where a non-resident acquirer proposes deferment of payment of the consideration; where a person resident in India intends to transfer any security by way of gift to a person resident outside India, subject to the gift not exceeding five per cent of the paid-up capital of the Indian company or of each series of debentures or each mutual fund scheme, the applicable sectoral cap not being breached, and the donor and donee being close relatives as defined in section 6 of the Companies Act, 2013; and for transfer of shares from an NRI to a non-resident. Government approval is required for transfer of shares of companies engaged in a sector falling under the government route, and for a transfer resulting in foreign investment in the Indian company breaching the applicable sectoral cap.

Category I foreign portfolio investors

Category I comprises government and government related investors such as central banks, sovereign wealth funds and international or multilateral organisations or agencies, including entities controlled or at least seventy-five per cent directly or indirectly owned by such investors; pension funds and university funds; regulated entities such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker-dealers and swap dealers; entities from Financial Action Task Force member countries or from any country specified by the Central Government by order, agreement or treaty with other sovereign governments; and an entity whose investment manager is from a FATF member country and is registered as a Category I foreign portfolio investor, or which is at least seventy-five per cent owned directly or indirectly by another entity eligible under the second, third or fourth heads which is itself from a FATF member country, provided that such investment manager or eligible entity undertakes responsibility for all acts of commission or omission of the applicant.

Category II foreign portfolio investors

Category II comprises regulated funds not eligible as Category I foreign portfolio investors; endowments and foundations; charitable organisations; corporate bodies; family offices; individuals; regulated entities investing on behalf of their clients as per conditions specified by SEBI; and unregulated funds in the form of limited partnerships and trusts. An applicant incorporated or established in an International Financial Services Centre is deemed to be appropriately regulated.

Code of conduct for foreign portfolio investors

A foreign portfolio investor and its key personnel must observe high standards of integrity, fairness and professionalism in all dealings in the Indian securities market with intermediaries and regulatory and other government authorities; must at all times render high standards of service and exercise due diligence and independent professional judgment; must maintain confidentiality in respect of trades done on its own behalf or on behalf of clients; must ensure clear segregation of its own money and securities from those of its clients and an arm's length relationship between its fund management or investment business and its other business; must maintain an appropriate level of knowledge and competency, abide by the Act, regulations, circulars and guidelines applicable to it and comply with the award of the Ombudsman and the decision of SEBI under the SEBI (Ombudsman) Regulations, 2003; must not make any untrue statement or suppress any material fact in documents, reports or information furnished to the designated depository participant or SEBI; must ensure good corporate policies and corporate governance; must not engage in fraudulent and manipulative transactions in listed securities; must not, itself or through its directors or managers, whether through their own accounts or through an associate, family members, relatives or friends, indulge in insider trading; and must not be a party to or instrumental in the creation of a false market, price rigging or manipulation of prices, or the passing of price-sensitive information to any person or intermediary.

Debt Instruments Regulations, 2019

The Foreign Exchange Management (Debt Instruments) Regulations, 2019 regulate investment in India in debt instruments by persons resident outside India, classified into foreign portfolio investors and non-resident Indians or overseas citizens of India. The entities eligible to receive debt funds are an Indian company, a limited liability partnership, asset reconstruction companies, mutual funds and venture capital funds. An FPI may purchase on repatriation basis, subject to terms and conditions specified by SEBI and the Reserve Bank, dated government securities and treasury bills; non-convertible debentures and bonds issued by an Indian company; commercial papers issued by an Indian company; units of domestic mutual funds or exchange-traded funds which invest less than or equal to fifty per cent in equity; security receipts issued by asset reconstruction companies; debt instruments issued by banks eligible for inclusion in regulatory capital; credit enhanced bonds; listed non-convertible or redeemable preference shares or debentures; securitised debt instruments including certificates or instruments issued by a special purpose vehicle set up for securitisation of assets with banks, financial institutions or NBFCs as originators; rupee denominated bonds or units issued by infrastructure debt funds; municipal bonds; and exchange traded derivative contracts approved by SEBI.

Designated depository participant

No person may act as a designated depository participant unless it has obtained SEBI's approval. The application is made to SEBI through the depository with which the applicant has an agreement to act as a participant, accompanied by the application fee, and the depository must forward it to SEBI as early as possible but no later than thirty days from receipt, with its recommendations and after certifying that the participant complies with the eligibility criteria. SEBI may not grant approval unless the applicant is a registered depository participant under the SEBI (Depositories and Participants) Regulations, 1996, a registered custodian under the SEBI (Custodian) Regulations, 1996, and an Authorised Dealer Category-1 bank authorised by the Reserve Bank of India under FEMA, 1999; has a multinational presence either through its branches or through agency relationships with overseas intermediaries regulated in their home jurisdictions; has systems and procedures to comply with Financial Action Task Force standards, the PMLA, 2002 and the rules and circulars under it; and is a fit and proper person under Schedule II of the SEBI (Intermediaries) Regulations, 2008. SEBI may also consider an application from an entity regulated in India or in its home jurisdiction on being satisfied that it has sufficient experience in providing custodial services and that approval is in the interest of the development of the securities market; such an entity must be registered with SEBI as a participant and custodian and must have a tie-up with an Authorised Dealer Category-1 bank.

Eligibility — Indian constituents of an FPI

A designated depository participant may not consider an application for registration as a foreign portfolio investor unless the applicant is not a resident Indian and is not a non-resident Indian or an overseas citizen of India. Non-resident Indians, overseas citizens of India or resident Indian individuals may be constituents of the applicant provided that the contribution of a single such person is below twenty-five per cent of the total contribution in the corpus, that the aggregate contribution of such persons is below fifty per cent of the total contribution, that the contribution of resident Indian individuals is made through the Liberalised Remittance Scheme notified by the Reserve Bank of India and is in global funds whose Indian exposure is less than fifty per cent, and that such persons are not in control of the applicant, meaning the right to appoint a majority of directors or to take management decisions. The individual and aggregate limits and the control condition do not apply to a foreign portfolio investor investing only in government securities; the aggregate limit does not apply to an applicant regulated by the International Financial Services Centres Authority and based in an International Financial Services Centre in India, or to a SWAGAT-FI.

Entry routes and instruments under the FDI scheme

Under the Foreign Direct Investment scheme investments can be made in shares, mandatorily and fully convertible debentures and mandatorily and fully convertible preference shares of an Indian company by non-residents through two routes. Under the automatic route the foreign investor or the Indian company requires no approval from the Reserve Bank or the Government of India. Under the government route prior approval of the Government of India, through the Foreign Investment Promotion Board, the Department of Economic Affairs, the Ministry of Finance or the Department of Industrial Policy and Promotion as the case may be, is required. Indian companies can issue equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares and warrants, subject to the pricing guidelines, valuation norms and reporting requirements prescribed under the FEMA Regulations.

FEMA — object and the two kinds of transaction

The Foreign Exchange Management Act is an act of the Parliament of India enacted in 1999 to replace the Foreign Exchange Regulation Act of 1973. It aims to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. Under FEMA the Reserve Bank of India is empowered to regulate and supervise all transactions involving foreign exchange, whether current account transactions or capital account transactions. Current account transactions relate to the normal business activities of an individual or entity, such as import and export of goods and services, travel and remittances. Capital account transactions are those that alter the assets or liabilities of an individual or entity, such as foreign direct investment, portfolio investment and external commercial borrowing. The Reserve Bank issues rules, regulations, notifications, circulars and guidelines to implement FEMA and ensure compliance by authorised dealers, banks, financial institutions and other entities, monitors the inflow and outflow of foreign exchange and intervenes in the market to maintain the stability of the exchange rate and the balance of payments.

Foreign Portfolio Investor

The SEBI (Foreign Portfolio Investors) Regulations, 2019 provide the framework for registration and procedures for foreign investors proposing to make portfolio investment in India. A foreign portfolio investor means a person who satisfies the eligibility criteria provided under Regulation 4 of the Regulations, and is deemed to be an intermediary in terms of the provisions of the SEBI Act.

Foreign venture capital and other NRI investments

A SEBI registered foreign venture capital investor with specific approval from the Reserve Bank may invest in equity, equity linked instruments, debt, debt instruments and debentures of an Indian venture capital undertaking or a venture capital fund, or in a scheme floated by such a fund provided the domestic fund is registered with SEBI, through an initial public offer, private placement, private arrangement or purchase from a third party. On a non-repatriation basis NRIs may purchase, without any limit, shares, convertible debentures and warrants issued by an Indian company, and also government dated securities, treasury bills, units of domestic mutual funds and units of money market mutual funds. NRIs may invest in non-convertible debentures and redeemable preference shares issued by an Indian company on both repatriation and non-repatriation basis. On a repatriation basis and without limit an NRI may purchase government dated securities, treasury bills, units of domestic mutual funds, bonds issued by a public sector undertaking in India, and shares in public sector enterprises being disinvested by the Government of India.

HSBC designated depository participant matter

HSBC was the designated depository participant and custodian of the foreign portfolio investor Pathway Finance Societe. Following a change in the FPI's name, ownership and jurisdiction it was alleged that the entity to which registration had been granted no longer existed, so that investment activity after those changes in January 2017 was ultra vires; the FPI nevertheless invested in corporate debt, sending funding instructions to the custodian on 19 December 2017 with payment released on 20 December 2017, so that the changed entity transacted as an FPI without a valid registration, contrary to section 12(1A) of the SEBI Act and regulation 3(1) of the FPI Regulations. The allegations that the DDP had failed to ensure that only a registered FPI invests and had failed to report the change of address, and that the custodian had failed to restrict the FPI from the debt limits auction and to block its accounts, were held not established. It was established, however, that the DDP failed to intimate SEBI immediately when there was a delay of more than six months in the FPI intimating a material change, namely change of domicile, violating clause 5.1.4 of the operational guidelines for DDPs. SEBI observed that a DDP grants registration to FPIs on behalf of SEBI, which casts an obligation to be prompt in reporting, and that the DDP had been lax; a penalty of Rs 5 lakh was imposed under section 15A(b) of the SEBI Act.

Jurisdiction, sanctions and fit and proper conditions

The applicant must be a resident of a country whose securities market regulator is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding or a signatory to a bilateral memorandum of understanding with SEBI, though a government or government related investor is eligible if resident in a country approved by the Government of India. A bank applicant must be resident in a country whose central bank is a member of the Bank for International Settlements, though a central bank applicant need not itself be a member. The applicant, or its underlying investors contributing more than the threshold prescribed under the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 or identified on the basis of control, must not be a person mentioned in the sanctions list notified by the United Nations Security Council, and must not be resident in a country identified in the public statement of the Financial Action Task Force as a jurisdiction having strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply, or as one that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF. The applicant must be a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008. The conditions on residence, jurisdiction and the central bank do not apply to an applicant incorporated or established in an International Financial Services Centre.

Mode of payment and refund under the FDI scheme

An Indian company issuing shares or convertible debentures under the FDI scheme to a person resident outside India must receive the consideration by inward remittance through normal banking channels, by debit to the NRE or FCNR account of the person concerned maintained with an AD Category-I bank, or by debit to a non-interest bearing escrow account in Indian rupees in India opened with the approval of and maintained with an AD Category-I bank on behalf of residents and non-residents towards payment of share purchase consideration. If the shares or convertible debentures are not issued within one hundred and eighty days from the date of receipt of the inward remittance or the date of debit to the NRE, FCNR(B) or escrow account, the consideration must be refunded.

Monitoring and the caution list

The Reserve Bank monitors the investment position of FPIs and NRIs in listed Indian companies, reported by custodian and designated authorised dealer banks, on a daily basis. The designated bank for NRIs and the custodian bank for FIIs must monitor the individual limit of each NRI or FPI to ensure that it does not breach the prescribed limits, that trades are not undertaken in prohibited sectors, and that all trades are reported to them by monitoring transactions in the designated account. The onus of reporting FPI and NRI transactions lies on the designated custodian or authorised dealer bank, the depository participant and the FPI or NRI making the investments. When the aggregate net purchases of equity shares of an Indian company by FIIs, NRIs or PIOs reach the cut-off point of two per cent below the overall limit, the Reserve Bank cautions all designated bank branches not to purchase any more equity shares of that company on behalf of any FPIs, FIIs, NRIs or PIOs without prior approval of the Reserve Bank.

Non-debt Instruments Rules, 2019

Non-debt instruments means all investments in equity instruments in incorporated entities, whether public, private, listed or unlisted; capital participation in a limited liability partnership; all instruments of investment recognised in the FDI policy notified from time to time; investment in units of alternative investment funds, real estate investment trusts and infrastructure investment trusts; investment in units of mutual funds or exchange-traded funds which invest more than fifty per cent in equity; the junior-most layer, that is the equity tranche, of a securitisation structure; acquisition, sale or dealing directly in immovable property; contribution to trusts; and depository receipts issued against equity instruments.

NRI and OCI debt investments and modes of payment

A non-resident Indian or overseas citizen of India may, without limit, purchase on repatriation basis government dated securities other than bearer securities, treasury bills, units of domestic mutual funds or exchange-traded funds which invest less than or equal to fifty per cent in equity, bonds issued by a public sector undertaking in India, bonds issued by infrastructure debt funds, listed non-convertible or redeemable preference shares or debentures, and debt instruments issued by banks eligible for inclusion in regulatory capital; and may subscribe to the National Pension System governed by PFRDA if eligible, the annuity and accumulated saving being repatriable. On non-repatriation basis and without limit such a person may purchase dated government securities other than bearer securities, treasury bills, units of domestic mutual funds or exchange-traded funds investing less than or equal to fifty per cent in equity, national plan or savings certificates, listed non-convertible or redeemable preference shares or debentures, and may subscribe to chit funds authorised by the Registrar of Chits or an officer authorised by the State Government. Consideration for purchases by FPIs must be paid out of inward remittance through banking channels or from a foreign currency account or Special Non-Resident Rupee account; by NRIs or OCIs on repatriation basis out of inward remittance or funds in an NRE or FCNR(B) account; and on non-repatriation basis, and for National Pension System subscriptions, out of inward remittance or funds in an NRE, FCNR(B) or NRO account.

Offshore derivative instruments

Foreign portfolio investors may not issue offshore derivative instruments referencing derivatives, and no FPI may hedge its ODIs with derivative positions on stock exchanges in India. By exception, through a separate FPI registration of an ODI issuing FPI under Category I, derivative positions may be taken on stock exchanges for hedging equity shares held in India on a one to one basis, and an ODI issuing FPI may hedge ODIs referencing equity shares with derivative positions in Indian stock exchanges subject to a position limit of five per cent of market wide position limits for single stock derivatives, the permissible position limit for stock index derivatives being the higher of one hundred crore rupees or five per cent of open interest. An ODI issuing FPI that hedges its ODIs only by investing in securities other than derivatives held in India may not undertake proprietary derivative positions through the same registration and must segregate ODI and proprietary derivative investments through separate registrations. In determining whether a derivative instrument is an ODI, the threshold for trades with non-proprietary indices as underlying is twenty per cent, so trades where the materiality of the Indian underlying is less than twenty per cent of the index are not regarded as ODIs even if hedged onshore, while trades with custom baskets as underlying, if hedged onshore, are always regarded as ODIs. Synthetic short activities, where ODIs are issued with the effect of a short sale in Indian securities, remain prohibited, and the ODI issuer must collect documents and information sufficient to satisfy itself about the relationship between the ODI subscriber and its investment manager from a FATF member country.

Other investment conditions for FPIs

In respect of investments in debt securities a foreign portfolio investor must also comply with the terms, conditions or directions specified or issued by SEBI or the Reserve Bank of India from time to time, in addition to the other conditions in the Regulations. Unless otherwise approved by SEBI, securities must be registered in the name of the foreign portfolio investor as beneficial owner as defined under the Depositories Act, 1996. An entity registered as a foreign portfolio investor is permitted to invest in Indian securities as a person resident outside India in accordance with FEMA, 1999 and the rules and regulations made under it. A foreign portfolio investor may lend or borrow securities in accordance with the framework specified by SEBI, and its investment is subject to such other conditions and restrictions as the Government of India may specify.

Portfolio Investment Scheme

Foreign portfolio investors registered with SEBI are eligible to purchase shares, convertible debentures and warrants issued by Indian companies under the Portfolio Investment Scheme, and NRIs are eligible if permitted by the designated branch of an AD Category-I bank. An individual FPI together with SEBI approved sub accounts may invest up to a maximum of ten per cent of the total paid-up capital or of the paid-up value of each series of convertible debentures acquired through any mode, and total holdings of all FPIs and their sub accounts together must not exceed twenty-four per cent of the paid-up capital or paid-up value of each series of convertible debentures; that limit may be increased up to the sectoral cap after obtaining the approval of the board of directors and the shareholders of the company. NRIs may invest through designated authorised dealers, on repatriation and non-repatriation basis, up to five per cent of the paid-up capital or paid-up value of each series of debentures of listed Indian companies, the aggregate for all NRIs not exceeding ten per cent, which may be raised to twenty-four per cent by a resolution of the board of directors followed by a special resolution of the shareholders. Shares purchased by NRIs and FPIs on the stock exchange under the scheme cannot be transferred by way of sale under private arrangement or by gift to a person resident in or outside India without prior approval of the Reserve Bank, except that NRIs may transfer such shares to their relatives as defined in section 6 of the Companies Act, 2013 or to a charitable trust duly registered under the laws in India.

Pricing of fresh issues, partly paid shares and warrants

For a fresh issue of shares to persons resident outside India under the FDI scheme, the price for listed companies is based on SEBI guidelines, and for unlisted companies must not be less than the fair value of the shares determined by a SEBI registered merchant banker or a chartered accountant as per any internationally accepted pricing methodology on an arm's length basis. For partly paid equity shares the pricing must be determined upfront and twenty-five per cent of the total consideration, including share premium, received upfront; for listed companies the balance towards fully paid equity shares must be received within twelve months if the issue size is Rs 500 crore or less, and for unlisted Indian companies the balance may be received after twelve months where the issue size exceeds Rs 500 crore, subject to the appointment of a monitoring agency. For warrants the pricing and price or conversion formula must be determined upfront with twenty-five per cent of the consideration received upfront; for listed companies the balance towards fully paid equity shares must be received within eighteen months, and for unlisted companies the price at the time of conversion must not be lower than the fair value worked out at the time of issuance. Prior approval of the Government is required if the activity or sector requires permission for investments; forfeiture of the amount paid upfront on non-payment of call money must be in accordance with the provisions of the Companies Act, 2013 and the income tax provisions; and sectoral caps must not be breached even after the shares are fully paid up or the warrants converted.

Reporting requirements to the Reserve Bank

Indian companies must report the receipt of consideration for the issue of shares, convertible debentures or warrants through an AD Category-I bank, with copies of the foreign inward remittance certificates evidencing receipt of the remittance and the KYC report on the non-resident investor from the remitting overseas bank, within thirty days from the date of receipt of the money; the report is acknowledged by the Regional Office concerned, which allots a Unique Identification Number. Equity instruments must be issued within one hundred and eighty days from receipt of the inward remittance or debit to the NRE, FCNR(B) or escrow account, failing which the consideration must be refunded immediately, though in exceptional cases the Reserve Bank may consider refund or allotment beyond that period on the merits. After the issue of shares, including bonus and rights shares, partly paid shares to the extent called up, convertible debentures, convertible preference shares and warrants to the extent called up, the company must file Form FC-GPR through its AD Category-I bank not later than thirty days from the date of issue, duly signed by the managing director, a director or the secretary and submitted to the authorised dealer, who forwards it to the concerned Regional Office. Transfers of shares, convertible debentures, partly paid shares and warrants between residents and non-residents are reported in Form FC-TRS, submitted to the AD Category-I bank within sixty days from the date of receipt of the consideration, the onus lying on the transferor or transferee resident in India. An Indian company issuing sweat equity shares, employees' stock options or shares against the exercise of stock options to employees or directors resident outside India must furnish Form-ESOP to the Regional Office of the Reserve Bank within thirty days from the date of issue. AD Category-I banks must ensure that FIIs registered with SEBI report all securities purchase transactions in Form LEC (FII) to the Foreign Exchange Department of the Reserve Bank. The designated link office of the AD Category-I bank must furnish to the Reserve Bank a report on a daily basis on Portfolio Investment Scheme transactions undertaken on behalf of NRIs for the entire bank. All Indian companies which have received FDI or made FDI abroad in the previous or current years must file the annual return on Foreign Liabilities and Assets in soft form with the Reserve Bank, Department of Statistics and Information Management, Mumbai, by 15 July every year.

Resident Indian non-individual constituents

Resident Indians other than individuals may be constituents of the applicant where such resident is an eligible fund manager of the applicant under section 9A(4) of the Income Tax Act, 1961 and the applicant is an eligible investment fund under section 9A(3) which has been granted approval under the Income Tax Rules, 1962. They may also be constituents where the applicant is an alternative investment fund or a retail scheme set up in an International Financial Services Centre and regulated by the International Financial Services Centres Authority, the resident is a fund management entity or an associate of it, and the contribution is up to ten per cent of the corpus in the case of an alternative investment fund or ten per cent of assets under management in the case of a retail scheme. A mutual fund registered under the SEBI (Mutual Funds) Regulations, 1996 may also be a constituent, subject to conditions specified by SEBI.

Rights, bonus, ESOP and merger issues

An Indian company may issue rights or bonus shares to existing non-resident shareholders subject to adherence to the sectoral cap and reporting requirements and compliance with the Companies Act, 2013 and the SEBI ICDR Regulations. Existing non-resident shareholders may apply for additional shares, convertible debentures or preference shares over and above their rights entitlement, and the investee company may allot the additional rights shares out of the unsubscribed portion provided the overall issue of shares to non-residents in the total paid-up capital does not exceed the sectoral cap. An Indian company may issue employees' stock options or sweat equity shares to its employees or directors, or those of its holding company, joint venture or wholly owned overseas subsidiaries, who are resident outside India, provided the scheme has been drawn in terms of regulations under the SEBI Act, 1992 or the Companies Act, 2013 and the issue complies with the applicable sectoral cap. On a merger or amalgamation of companies in India the transferee company may issue shares to shareholders of the transferor company resident outside India, provided the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap and neither company is engaged in activities prohibited under the FDI policy.

Secondary market conditions for FPIs

A foreign portfolio investor must transact in securities in India only on the basis of taking and giving delivery of securities purchased or sold, except for transactions in derivatives on a recognised stock exchange, short-selling transactions in accordance with the framework specified by SEBI, transactions pursuant to an agreement with a merchant banker in the process of market making or subscribing to an unsubscribed portion of an issue under the ICDR Regulations, 2018, and other transactions specified by SEBI. Dealing must be only through stockbrokers registered with SEBI, except for transactions in government securities and other securities under the purview of the Reserve Bank, sales in response to a takeover letter of offer, a delisting offer or a buy-back, disinvestment through depository receipts, bids in response to Central or State Government disinvestment offers, market making, transactions in corporate bonds, transactions on the electronic book provider platform of recognised stock exchanges, receipt, holding and sale of unlisted securities and securities received through involuntary corporate actions, transfers of right entitlements, purchases or sales of illiquid, suspended or delisted securities, transactions between registered foreign portfolio investors who are a multi-investment manager structure of the same beneficial owner with a common permanent account number, and other transactions specified by SEBI. Unlisted holdings arising in this way are treated as foreign direct investment. Securities must be held, delivered or caused to be delivered only in dematerialised form, though physical shares held before the commencement of the regulations may continue where they cannot be dematerialised, and rights entitlements may be held or transferred in non-dematerialised form.

Securities in which an FPI may invest

Under regulation 20 a foreign portfolio investor may invest only in shares, debentures and warrants issued by a body corporate and listed or to be listed on a recognised stock exchange in India; units of schemes launched by mutual funds under Chapters V, VI-A and VI-B of the SEBI (Mutual Fund) Regulations, 1996; units of schemes floated by a collective investment scheme under the SEBI (Collective Investment Schemes) Regulations, 1999; derivatives traded on a recognised stock exchange; units of real estate investment trusts, infrastructure investment trusts and units of Category III alternative investment funds registered with SEBI; Indian depository receipts; any debt securities or other instruments permitted by the Reserve Bank of India for foreign portfolio investors from time to time; and such other instruments as SEBI specifies.

Stock Holding Corporation of India matter

SEBI inspected documents and records of Stock Holding Corporation of India Limited to verify possible violations of the FPI Regulations, and observed non-maintenance of records and documents, registration of ineligible foreign portfolio investors, discrepancies in the DDP manual, non-compliance with KYC and demat forms, non-compliance with the fit and proper check, and failure to segregate activities and maintain necessary infrastructure. The adjudicating officer noted that the material on record did not quantify any disproportionate gains or unfair advantage made by the DDP or losses suffered by investors, and that it was not ascertainable whether the acts were repetitive; but held that the role of a DDP is crucial as it is primarily responsible for the registration and onboarding of FPIs, registration being intended to protect the interests of investors and casting accountability and responsibility on the DDP to comply with all regulatory requirements so as to promote the best interests of clients and the integrity of the market. The irregularities, together with delay in forwarding the audit report on internal controls, did not absolve it from penalty and clearly showed that it had failed in its fiduciary duties owed to its clients. A fine of Rs 16 lakh was imposed.

Suspension, cancellation and surrender of FPI registration

Registration granted by a designated depository participant on behalf of SEBI is permanent unless suspended or cancelled by SEBI or surrendered by the foreign portfolio investor. Suspension and cancellation are dealt with in the manner provided in Chapter V of the SEBI (Intermediaries) Regulations, 2008. A foreign portfolio investor wishing to surrender its certificate requests the designated depository participant, which accepts the surrender after obtaining SEBI's approval and may impose such conditions as SEBI specifies. Before applying to SEBI for a no objection certificate the designated depository participant must confirm that the accounts held by the applicant as an FPI have nil balance and are blocked for further transactions and that its custodial participant code is blocked, that there are no dues or fees pending towards SEBI, and that there are no actions or proceedings pending against the applicant. Within ten days of receipt of the no objection certificate the participant must ensure that all accounts, including bank and securities accounts, held by the applicant as an FPI are closed and that the custodial participant code is deactivated.

SWAGAT-FI

Single Window Automatic and Generalised Access for Trusted Foreign Investor, or SWAGAT-FI, includes, subject to conditions specified by SEBI from time to time, government and government related investors as provided under regulation 5, and public retail funds as defined in the explanation under regulation 22(4). The aggregate fifty per cent limit on contributions by non-resident Indians, overseas citizens of India and resident Indian individuals does not apply to a SWAGAT-FI.

The ten per cent limit and its consequences

The purchase of equity shares of each company by a single foreign portfolio investor including its investor group must be below ten per cent of the total paid-up equity capital of the company on a fully diluted basis. Where the total investment by a foreign portfolio investor including its investor group exceeds that threshold in a listed or to be listed company on a fully diluted basis, the investor must divest the excess holding within five trading days from the date of settlement of the trades resulting in the breach. If it fails to divest, the entire investment in that company by the foreign portfolio investor including its investor group is considered an investment under foreign direct investment, as per the procedure specified by SEBI, and neither the investor nor its investor group may make further portfolio investment in that company under the Regulations.

Transfer of existing shares

On a transfer of existing shares from a resident to a non-resident the price for listed companies is a negotiated price not less than the price arrived at for preferential allotment of shares under SEBI guidelines, and for unlisted companies not less than the fair value worked out as per any internationally accepted pricing methodology on an arm's length basis, duly certified by a chartered accountant or a SEBI registered merchant banker. On a transfer from a non-resident to a resident the negotiated price must not be more than the minimum price at which the transfer could be made from a resident to a non-resident. A person resident outside India other than an NRI may transfer by sale or gift to any person resident outside India including NRIs, and NRIs may transfer by sale or gift to another NRI. A person resident outside India may transfer any security to a person resident in India by way of gift, and general permission is available for a sale under private arrangement provided the original and resultant investment comply with the FDI policy and FEMA regulations, the pricing complies with the relevant SEBI regulations, and a chartered accountant certificate to that effect is attached to the Form FC-TRS filed with the AD bank. A person resident outside India may sell shares and convertible debentures of an Indian company on a recognised stock exchange in India through a stockbroker registered with the exchange or a merchant banker registered with SEBI.