Thursday, January 5, 2012

India- Qualified financial investors

VC Circle

Key Highlights of the Proposed New Regime as provided under the Press Release
1.      RBI to grant general permission (i.e. under the automatic route) to QFIs for investment under PIS route similar to FIIs.
2.      The investment by QFIs would be subject to an individual investment limit of 5% of the paid up capital of the Indian company and an aggregate investment limit of 10% of the paid up capital of the company. These limits are over and above the limits applicable in case of investment by FIIs or NRIs under PIS route.
3.      QFIs would be allowed to invest only through a SEBI registered qualified depository participant (“DP”) and all the transactions would have to be made through this DP only.
4.      DPs would be the ones who would be required to ensure that the QFIs comply with the KYC norms and the stipulated regulatory requirements.

Future of FII/sub-account route: Under the current SEBI (Foreign Institutional Investors) Regulations, 1995 (“FII Regulations”), there are stringent conditions imposed on the registration of FIIs and sub-accounts such as if an asset management company or an investment advisor has to be registered as an FII, it has to indicate that it is proposing to make investments on behalf of broad based funds. Further, funds can be registered as sub-accounts only if they fulfill the broad based criteria. Similarly, if an individual wants to register as a sub-account, then inter alia he has to fulfill minimum net worth criteria of USD 50 million.
The recent Press Release does not propose any registration / eligibility requirements upon QFIs. However, as we await the regulatory framework applicable to investments by QFIs, imposition of any such similar onerous conditions on QFIs would make this investment route equivalent with the FII regime and would defeat the intent of liberalization. However, the flip side of the story is that in the above scenario it needs to be seen what remains of the FII route, as entities would prefer to invest directly as QFIs, rather than seeking a registration under the FII route and complying with its cumbersome requirements.
Individual investments possible: Unlike FIIs, where there is a definite intent of SEBI to move towards broad based investments, this QFI regime may provide opportunities to individuals to invest on their own account and thereby facilitate them to hold Indian portfolios distinct from the other investors.
Further, until now SEBI was not comfortable giving sub-account registration to foreign individuals / foreign corporates. However, with the introduction of the new liberalised regime, such foreign individual / foreign corporate may have a new avenue to invest in Indian listed entities.
Investment by NRIs covered or not: The Mutual Fund Circular which brought in the regulatory framework for investment by QFIs into mutual fund schemes did not specifically exclude NRIs from the definition of QFIs, as it did in the case of FIIs and sub-accounts. Thus, NRIs may have been allowed to make investments into mutual funds as QFIs.
The Press Release while explaining QFIs also fails to exclude NRIs from its ambit. However, the Press Release provides that the investment limits prescribed for QFIs shall be over and above the FII and NRI investment ceilings under the PIS. Thus, it has to be seen if the fine print of law relating to QFIs would specifically exclude NRIs from its ambit or would it leave the place for NRIs to make investments into Indian entities as QFIs. Considering that a separate PIS route is already available to NRIs, it is unlikely that NRIs may be allowed to invest through the QFI route.
Key implications of the Proposed New Regime
1.      This move leads to further dis-intermediation of the capital markets for foreign investors who were earlier forced to come through the FII route.
2.      Depending on the eligibility criteria that may be prescribed for QFIs, this could potentially have a knock-on effect on FII and sub-account eligibility criteria leading to easing of the norms for such registrations.
3.      It needs to be seen how the limits are monitored for entities who may also come in under the QFI route. 

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