With a slowdown in economy and inflow of foreign funds into the country, the Ministry of Finance is finding out ways to attract foreign direct investment into the country. One of such ways is to allow certain foreign investors to directly invest in Indian securities through mutual fund schemes and corporate debt securities.
First such measure was notified in August 2011 by Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) whereby Qualified Foreign Investors were permitted to invest in schemes of Indian mutual funds by directly holding units in the mutual funds by opening a demat account with a SEBI registered Depository Participant (DP). Not only the DP is to be registered with SEBI but it has to fulfil certain qualifying criteria as prescribed by SEBI to qualify as a DP to accept and open QFI demat accounts.
A Qualified Foreign Investor has been defined as:
· An individual or a group or an association who is a resident of a country which is signatory to International Organization of Securities Commission's (IOSCO’s) Multilateral Memorandum of Understanding (MMOU) or who is compliant with Financial Action Task Force (FATF)1 standards;
· Not a resident of India; and
· Not registered with SEBI as a Foreign Institutional Investor (FII) or a Sub-Account or a Foreign Venture Capital Investor;
With the term “person” and “resident of India” carrying the same meaning as that of Section 2 (31) of the Income Tax Act, 1961.
INVESTMENT in DEBT MUTUAL FUND SCHEMES
It was prescribed by SEBI that the maximum ceiling on investment by QFIs in the debt schemes of mutual funds shall not cross beyond USD 10 billion. Additionally, QFIs could invest in the debt schemes which invest in infrastructure debt up to USD 3 billion within the existing ceiling of USD 25 billion for FII investment in corporate bonds issued by infrastructure companies.
INVESTING IN EQUITY SHARES
Subsequently, various amendments have been notified to the scheme of investment by Qualified Foreign Investors to simplify the registration process and to make the Indian capital markets more attractive. A chronology of various notifications and circulars is provided at the bottom of this article.
First such amendment was issued on January 13, 2012 whereby RBI and SEBI has prescribed in detail the KYC norms and procedure which has to be followed by DPs before opening a QFI demat account (see here). Also, QFIs were now allowed to directly invest in equity shares of Indian companies, IPOs, rights or bonus issues, stock-splits or consolidation or on account of amalgamations or mergers and acquisitions.
INVESTING IN CORPORATE DEBT
Further, directly accessing the Indian securities market by QFIs has been made more lucrative by announcing on July 16, 2012 by Reserve Bank of India (RBI) and on July 18, 2012 by SEBI the Scheme for Investment by QFIs in Indian Corporate Debt Securities. The eligible debt instruments for the purpose include Non-Convertible Debentures(NCDs), listed bonds of Indian companies, listed units of Mutual Fund Debt Schemes and “to be listed” corporate bonds (“eligible debt securities”). These eligible debt securities can be purchased directly from the issuer or through a registered stock broker on a recognized stock exchange in India. QFIs are also permitted to sell eligible debt securities so acquired by way of sale through registered stock broker on a recognized stock exchange in India or by way of buyback or redemption by the issuer.
Whereas the RBI Circular lays down the guidelines concerning the financing to purchase these eligible debt securities and repatriation of funds on their sale by QFIs, the SEBI Circular details the modalities of investing and reporting by the Depositories. The Circular lays down the overall limit for investment in corporate debt securities and mutual fund debt schemes as USD 1 billion which is over and above the limit of USD 20 billion for FII investment in corporate debt. No prior approval is required until the aggregate investment limit reaches 90% of the ceiling limit of USD 1 billion. This investment ceiling shall be monitored by the Depositories and the data shall be published daily on their websites for the purposes of dissemination of information to the general public. In case, any QFI crosses the overall investment limit of USD 1 billion, the stock exchanges are supposed to provide the details of transactions including the name and other details of the QFI breaching the limit to the depositories. The QFI is bound to offload the excess investment within 3 working days of such breach being notified by the Depositories to the DP with whom the QFI is registered.
Further, RBI relaxed the investment restriction on QFIs to debt mutual funds schemes which invest in infrastructure companies on June 25, 2012 vide its circular A.P. (DIR Series) Circular No. 135 dated June 25, 2012. SEBI also notified this relaxation vide its Circular dated July 20, 2012. Under the new guidelines, QFIs can now invest in the mutual fund debt schemes which have at least 25% of their assets, both equity or debt, in infrastructure sector within USD 3 billion limit of debt mutual fund schemes which invest in infrastructure companies bonds.
The Indian regulators, both RBI and SEBI, and the Ministry of Finance are making all efforts to make investing in India by foreign investors more enticing and less cumbersome by simplifying the registration procedure and opening up the avenues for investment, yet the onus and responsibility put on a DP to monitor the investments made by QFIs and a higher level of accountability in case of non-compliance by a QFI is compelling the DPs to charge significant fee coupled with uncertainties of the tax regime for foreign investors are some of the factors holding the QFIs to bring in more foreign investments into the country.
Chronology of SEBI Circulars related with QFI investments:
1. No. Cir/IMD/DF/14/2011 dated August 9, 2011
2. No. Cir/IMD/FII&C/3/2012 dated January 13, 2012
3. No. Cir/IMD/FII&C/13/2012 dated June 07, 2012
4. No. Cir/IMD/FII&C/17/2012 dated July 18, 2012
5. No. Cir/IMD/FII&C/18/2012 dated July 20, 2012
Ruchira Gupta, Corporate Legal Advisor