Streamlining the Onboarding Process of Foreign Portfolio Investors

Swetha Dhinesh

29 Mar, 2023

In an attempt to facilitate the ease of doing business and to reduce the time taken for registration of Foreign Portfolio Investors (“FPIs”) under the SEBI (Foreign Portfolio Investors) Regulations (“FPI Regulations”), SEBI, in its new circular dated March 27, 2023, simplifies the procedural requirements for onboarding of FPIs. Together with the procedural adjustments, SEBI has also given its approval to certain amendments to the various timelines outlined in the FPI Regulations. We will talk about the new circular and the main aspects of the new notification in this blog.

SEBI’s decision on procedural requirements

With the purpose of easing the onboarding of FPIs, the SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2023, were notified on March 14, 2023. In accordance with Regulation 3 (2) of the SEBI (Foreign Portfolio Investors) Regulations, 2019, a request for the issuance of a certificate as a foreign portfolio investor must be made to a Designated Depository Participant (or “DDP”) in the form and manner specified by the Government or the Board from time to time. 

It must be accompanied by the fee listed in Part A of the Second Schedule and any supporting documentation in the manner specified by the Board from time to time. As per Regulation 3(1), No person may purchase, sell, or otherwise transact in securities as a foreign portfolio investor unless such person has obtained a certificate from a designated depository participant on behalf of the Board.

Foreign Portfolio Investors

The Securities and Exchange Board of India is responsible for regulating foreign portfolio investment in India (SEBI). Investment groups or FIIs (foreign institutional investors) and QFIs (Qualified Foreign Investors) are referred to as FPIs in India.

Securities and other financial assets held by investors in a foreign nation are included in foreign portfolio investment (FPI). Based on market volatility, it is relatively liquid and does not provide the investor with direct ownership of the company’s assets. Together with foreign direct investment, FPI is a popular technique for investing in a foreign economy. Both FDI and FPI are well-known to be significant financial sources for most economies.

It enables businesses to raise huge amounts of capital without raising hefty expenses. Exchange rate variations can be quite profitable for investors. FPIs inevitably gravitate towards more expansive markets with less rivalry. For any investor, this combination is comparatively attractive.

Key points of the new notification

Grant of Foreign Portfolio Investors registration on the basis of scanned copies of application forms and supporting documents:

The Foreign Portfolio Investors registration may now be granted by designated depository participants (DDPs) on the basis of scanned copies of the application form and any required supporting documentation. Also, the Securities and Exchange Board of India has permitted DDPs (Designated Depository Participants) to recognise Foreign Portfolio Investors use of digital signatures while executing documents connected to registration.

• Based on scanned copies of the applicant’s executed Common Application Form (or “CAF”), certified supporting documents, and any necessary fees, the Designated Depository Participants may approve the applicant’s request for FPI registration.

• The DDP will then update the CAF module in accordance with the established procedure to issue Permanent Account Numbers (or “PANs”).

• The DDP/Custodian must post the scanned copies of the applicant’s certified Know Your Client (‘KYC’) documentation on the KYC Registration Agencies (‘KRA’) after the applicant has received a PAN. Other intermediaries or businesses may obtain these records from the KRA and fulfil their KYC obligations in order to open demat, trading, and bank accounts.

• The Custodian must ensure that suitable systems and procedures are in place to stop any activity in these accounts until physical documentation can be verified.

• The Custodian shall submit an application to the Clearing Corporation (‘CC’) for the allocation of a CP Code to the FPI and take the appropriate actions to enable the FPI to transact in the Indian securities markets only after receiving and verifying the physical documents by the DDP/Custodian.

• Use of Digital Signatures by FPIs – Provided that they do so in line with the Information Technology Act of 2000’s^[1] rules, FPIs may utilise digital signatures to execute CAFs and other documents relevant to registration, provided such digital signatures are in line with the provisions of the Information Technology Act, 2000.

The action will shorten the registration period. At present, FPI applicants must deliver physical application forms and supporting documents, as well as scanned copies, to the DDPs in order to be registered as an FPI. It should be noted that while registration on the basis of scanned copies has been permitted, trade can only be started after the actual documents have been verified.

Certification of copies of original documents by authorised bank officials using the SWIFT mechanism:

According to the circular, Sebi has permitted authorised bank employees to use the SWIFT system for certification of copies of original documents given by FPIs in an effort to lessen the physical movement of documents and the time required for registration. These actions are intended to speed up the onboarding process for FPIs, shorten the time needed to grant registration, and open demat, trading, and bank accounts for FPIs.

• All documentation provided by FPI applicants must currently be supplied with originals in order to be verified. As stated in Paragraph 8 of Part B of the Master Circular, copies of any document that is not the original must be physically attested by organisations that are authorised to certify documents physically.

• In lieu of physical attestation, authorised bank officials (i.e., officials of Multinational Foreign Banks or any Bank regulated by the RBI) may certify copies of original documents through the SWIFT mechanism, which DDPs/Custodians may accept for the purpose of document verification.

• The authorised bank official shall be obliged to transmit digital copies of the original documents to the DDP/Custodian and attest to the validity of these documents using genuinely accessible format SWIFT message types (such as SWIFT MT 599) transmitted to the DDP/Custodian.

PAN verification using the CAF module accessible via the Depositories’ websites:

The DDP/Custodian may validate the FPI’s PAN based on its availability on the CAF module hosted on the depositories’ website. The PAN is reflected via an automatic secure feed from the Income Tax Department, in circumstances when the FPI applicant submits a PAN application through the CAF Portal.

FPI applicants may submit a unique investor group ID rather than comprehensive information on the members of the group:

• At the time of registration, an FPI applicant is now required to give information on other FPIs with whom it shares common control or ownership of more than 50%. For each of these FPI investor groups, depositories create a unique FPI investor group ID.
• According to Sebi, if an FPI applicant is a member of an existing FPI investor group, it may provide its specific FPI investor group ID in the CAF without providing comprehensive information about every group member for operational convenience. According to the statement, if the applicant wants to include more foreign portfolio investors (apart from itself) in the unique investor group ID, they need to submit their information along with the investor group ID.

Conclusion

Sebi’s latest circular will be applicable with immediate effect. The Securities and Exchange Board of India Act, 1992’s Section 11 (1) powers were used to issue this circular. The FPI industry urgently needs the actions mentioned above since the procedural leniencies they have suggested will undoubtedly help to increase the number of foreign investors in the Indian listed market.

Also Read: How Foreign Portfolio Investors can Invest in India?