SEBI Registration

Qualified Foreign Investors (QFIs) Investment in Equity Shares

The scheme of Qualified Foreign Investor was initially floated by the Government of India with the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) in the year 2011 through a Union Budget announcement. This scheme was floated with the objective of infusing more foreign capital in the Indian capital market and also to reduce market volatility since foreign individual investors are considered to be long term investors compared to foreign institutional investors.   

This piece of writing talks about meaning, the permitted transactions allowed to the Qualified Foreign Investors and the associated restrictions and limits imposed by the regulating bodies.    

Who are Qualified Foreign Investors (QFIs)?

Qualified Foreign Investors or popularly called as QFIs^[1] are nothing but a sub-set of Foreign Portfolio Investors and include the following:

• Individuals, associations or groups who are resident in a country which is a member of Financial Action Task Force (FATF); or 
• A country who is a member of a group which is a member of FATF; and

Is a resident of a country that is signatory of International Organisation of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (MMoU) or a signatory of a bilateral MoU with Securities and Exchange Board of India (SEBI).

However, QFIs do not include within their ambit Foreign Institutional Investors (FIIs)/ Foreign Venture Capital Investor (FVCI)/ Sub accounts.   

Transactions where QFIs are allowed to make investments in Indian securities   

In the following transactions, the QFIs have been permitted to enter into transactions:

1. QFIs can purchase or subscribe to Mutual Fund units through their Dematerialised account mode which is the direct mode of making investments or they can resort to Unit Confirmation Receipt (UCR) which shall be indirect route.
2. QFIs have been permitted to purchase equity shares in public issues which are listed on recognised stock exchanges in India.
3. QFIs can also purchase listed equity shares which are listed on the recognised stock exchanges of India through SEBI registered stock brokers.
4. They also have the option to redeem the mutual fund units purchased or subscribed either through direct route or indirect route.
5. QFIs have been allowed to sell their shares that are held in their demat account through SEBI registered stock brokers.
6. They can subscribe to equity shares against rights issue.
7. QFIs are eligible to receive bonus shares or shares on stock split or consolidation.
8. The shares that QFIs receive as a result of mergers, acquisitions, demerger or such other corporate actions subject to the investment limits of the QFIs.
9. Dividends and interest payments received by QFIs are also present in the group.
10. When QFIs tender equity shares in the open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2009
11. When QFIs tender equity shares in the open offer in accordance with the SEBI (Delisting of Equity Shares) Regulations, 2011
12. When QFIs tender equity shares in case of buy-back by listed companies in accordance with the SEBI (Buy-back of Securities) Regulations, 1998
13. QFIs also have the prerogative to purchase corporate debt securities listed on the recognised stock exchanges.
14. QFIs can also purchase corporate debt securities through public issues if the listing on recognised stock exchanges of India is committed to be done according to the existing provisions of the Companies Act, 1956.
15. QFIs can also opt for the option of sale of corporate debt securities by way of buyback or redemption by the issuer
16. They can also Purchase and sell of units of debt schemes of Indian mutual funds.

Restrictions on the transactions made by QFIs

For the following types of transactions, Qualified Foreign Investors have been restricted by law:

1. QFIs have not been permitted to issue Offshore Derivative Instruments or participatory notes in exchange of shares in India.
2. QFIs have been permitted to open a single non-interest bearing Rupee account with an Authorise Dealer Category-I bank in India subject to the terms and conditions specified under FEMA, 1999 from time to time. They can open only one Dmat account with any of the Qualified Depository Participant (QDP) and all the transactions related to sale and purchase of equity shares shall be done through this account only.
3. The QFIs have been permitted to trade in Indian equity shares only on delivery basis..

Limitations on the investment made by Qualified Foreign Investors  

Following are the limitations that have been imposed on the QFIs by the regulatory bodies:

• A limit has been set on the maximum shareholding of QFIs in an Indian company. The total shareholding of a QFI cannot exceed 5 percent of the paid-up equity capital of any company at any point of time. The limit of 5 percent is applicable in each class of equity shares having distinct and separate ISIN.
• Further, the aggregate shareholding of a QFI cannot exceed 10 percent of the paid-up equity capital of the company at any point of time where each equity share class has separate and distinct ISIN.

Conclusion 

The category of Qualified Foreign Investors has been subsumed in Foreign Portfolio Investors from the time when SEBI (Foreign Portfolio Investors) Regulations, 2014 were introduced by the government. Nonetheless, it is very important for the Indian capital market to have good capital inflow from foreign inflows keeping in mind the needs of growing and emerging India.