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Foreign Portfolio Investors: Its Time Has Come!

Published on Fri, Jul 05,2013 | 19:38, Updated at Fri, Jul 05 at 19:40Source : 

By: Jyoti Rai,  Sr. VP & Head Business Development, SBISG Global Securities Services

Victor Hugo would have had something in common with the celebrated seer Nostradamus as few would have ever thought of the reforms, that are today under way in India, back then in 1800. One of the most famed quotes  of the novelist  “An invasion of armies can be resisted, but not an idea whose time has come” reveals a lot in the context of the scene unfolding in India’s foreign investment regime. Harmonization of entry routes of Foreign Investors and FPIs is one such idea whose time has come!

Experts in behavioural science say that the toughest aspects of any human and human run enterprise are first – suggesting a change to the routine it has been born with, second – formation of change and the most difficult part is accepting the change. SEBI has now taken steps to let go of one of the key functions it had zealously performed ever since its formation – that of registering FIIs for entry into Indian Capital markets. The regulator is now ready to delegate this responsibility to eligible entities under its regulations. These entities will be called Designated Depository Participants (DDPs). This change which SEBI has recommended will, if accepted and implemented by the Government, transform the landscape of foreign investments into India.

I am talking about the much discussed report of K. N Chandrasekhar Committee on the Rationalization of Investments Routes and Monitoring of Foreign Investments which has carried forward the recommendations of the UK Sinha WGFII committee.

My Company SBI-SG Global Securities Services Pvt Ltd was a member of this committee and our MD Mr. Sasikumar was the appointee and I worked with him on the matters under consideration. The approval and receptiveness SEBI showed for feedback and to the suggestions we had to offer was most uplifting.

The Committee and its appointees have a remarkable story to tell. This was my first opportunity to be a part of such an initiative and since such opportunities don’t come frequently, I will share my perspective in detail. The composition of the Committee was diversified with 22 members and a Chairman. For the first time probably, RBI was also represented in such a committee of SEBI. It also had fair representation from the relevant departments of GOI, such as Ministry of Overseas Indian Affairs, Revenue Ministry and Ministry of Economic Affairs. And it had market participants like AD (Authorised Dealer) Category foreign banks, law firms, chartered accountants, stock exchanges, DPs, FIIs, corporates and, like us, custodians.

Critics may find it easy to pick holes in the report and argue that the Committee has not gone far enough. However, having been part of the group that helped the Committee members and having seen SEBI officials and committee members work tirelessly, arguing, debating over contentious issues and then formulating the Report, I would certainly beg to differ.

This  Committee’s remit was challenging. First, it had to live up to that IDEA which Victor Hugo had seen it becoming... it had to do away with a job which they had mastered i.e. FII registration process which is not merely a simple case of registration but rather a rigorous  and long drawn out process saddled with several compliance related issues and where SEBI also has to verify the correctness of various documents and claims. Thus, one must commend SEBI for this historic step. The voluntary giving up of the powers poses great challenges to SEBI - the challenge of  delegation of powers to the DDPs for FPI registration, the challenge of maintaining quality monitoring, reporting & compliance in the regime while the entry routes are relaxed and collapsed, the challenge to recognize, classify & address all possible impediments which may surface if the route has to be implemented and to see that market participants do not change the goal post each time a regulation is up for a correction, the challenge of being receptive, the challenge of not losing the end objective by recommending something which may take a long time for acceptance and implementation and the challenge of taking everybody along and meeting the end objective.

Each aspect of the new unified route was thought through and solutions and alternatives deliberated. In the various debates that took place, the  Committee had to address very crucial questions like why rationalize at all, who should be recognised as FPIs and who should not, how  will the suggestions  be interpreted, why have a risk based approach in KYC, how much to exempt in KYC, what will these exemptions lead to,  why will it be better to keep FVCI and NRI out, what legislative challenges will it throw open on Income-tax, FEMA, PMLA fronts, how to resolve and relax norms, what hurdles DDPs may face,  how university funds are at an advantage over family trusts, what should be the eligibility bar for DDPs, who should make it and  why one should not etc.

The Committee has successfully met the challenges and the final recommendations are path breaking. I am sure that we will see positive results emerging from the suggestions made.

The most prominent outcome of the Committee has been SEBI doing away with the FPI registration and collapsing of FII/Sub accounts & QFIs into one single route. It’s likely that further liberation may happen as time goes by. Foreign investors will certainly appreciate the idea of uniform entry route and the steps taken by SEBI in this direction. We should see uniform KYC regime which too was being demanded for a very long time. The recommendations of the Committee along with consistent policies will certainly lead to unleashing of some great opportunities for our markets. The idea of Foreign Portfolio Investor (FPIs) is here!

Views are personal.


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