Tag: SEBI

Introduction

Foreign Portfolio Investment is holding financial assets in a country other than in the investor’s own country. It is an investment in mutual funds, bonds and securities (stocks, American Depositary Receipts, or Global Depository Receipts) of companies headquartered outside the investor’s nation. The transaction of foreign securities occurs at an organized formal securities exchange or through an over-the-counter market transaction. Foreign portfolio investment is becoming a means of portfolio diversification. The portfolio is a collection of financial assets and investments owned by an individual, a financial institution or an investment firm. Financial assets include valuables ranging from stocks, funds, derivatives property, cash equivalents, bonds, etc. In India SEBI regulates the activities involve in investment. It sets the eligibility criteria, limits the amount that can be invested and categorizes the type of investments. 

Categories for Foreign Portfolio Investors (FPI)

The Foreign Portfolio Investors in India are divided into Three Categories:

Category I foreign portfolio investor:  Government and investors related to Government which includes central banks, Governmental agencies, wealth funds and international or multilateral organizations or agencies.

Category II:  In this category FPI like appropriately regulated Mutual Funds, Investment trusts, insurance/reinsurance companies, banks, asset management companies, investment managers/ advisors, portfolio managers, university funds and pension funds etc.

Category III: All those investors that do not fall under Category I and II foreign portfolios investors such as endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.

Every Foreign Portfolio Investor is required to obtain Registration for FPI with Designated Depository Participant (DDP) on Behalf of SEBI.

SEBI (Foreign Portfolio Investors) Regulations 2014 (“2014 Regulations”) have provided certain exemptions from registration to foreign institutional investors and qualified foreign investors. 2019 Regulations have scrapped some of these exemptions and it has made a mandate that every person dealing in securities as FPI to mandatorily acquire a registration certificate from the Designated Depository Participant. Further, existing offshore funds set up by Indian mutual funds existing offshore have to register themselves as FPIs by March 22, 2020. In 2014 Regulations eligibility for FIP license was only given to those central banks which are members of the Bank of International Settlement. Whereas through the 2019 regulations, SEBI in order to attract more investors recognized non-BIS registered central banks as eligible for FPI license. Under the FPI 2014 Regulations, a fund should not be registered as an FPI if it fails to qualify the broad-based criteria. A fund qualified as a broad-based fund if it had at least 20 investors with no investor holding more than 49% shares of the fund. 2019 Regulations have scrapped away with this requirement. 

The 2019 Regulations provide that FPIs set up in the International Financial Services Centre (“IFSC”) are required to satisfy the jurisdiction criteria under Regulation 4 for registering as an FPI. An entity set up in an IFSC is qualified to be registered as an FPI even though that entity would be a domestic entity.

Investment limit: The FPI regulations regulate and provide for a threshold on the total investment incurred by each company by the FPI including its investor group. The FPI Regulation of 2014 had set the investment threshold of 10 per cent of the issued capital of the company. Under the 2019 Regulations, the threshold has now been changed to 10 per cent of the ‘fully diluted paid-up equity capital of a company. 

Classification of Category I

Under the 2014 FPI Regulations, FPIs were divided into 3 categories under which easier compliance norms for Category-I FPIs were given and the strictest for Category-III FPIs. Under the new framework of 2019 Regulations, SEBI decided to reduce the total number of categories and to re-categorize into two categories, Category I and Category II FPIs. 

FPI Registration

Companies that issue shares and securities would be registered under the stock exchange. An Indian company that wishes to register its securities on the stock exchange would have to abide by the rules established by the Securities Exchange Board of India (SEBI). An investor who wants to indulge themselves with Foreign Portfolio Investment has to make an application and obtain a certificate of registration from the respective board. The offshore fund which falls under the purview of an Asset Management Company is required to make an application under Foreign Portfolio Investor Registration. The offshore fund is required to secure such registration within a period of 180 days.

Under the SEBI (FPI) regulations, 2019 any applicant would have to liaise with the Designated Depository Participant (DDP) for making such an application for foreign portfolio investor registration. A DDP can be defined as a person or an institution who has been approved by the board under Chapter III of the 2019 regulations. In order to take different forms into consideration for registering under FPI, the DDP would act as a negotiator between the applicant and the board.

Procedure to get registration

1. Appoint a legal representative: 

 Legal representatives are required in India to fill out the forms and do the paperwork as required by the regulatory authorities. The role of a legal representative can be performed by any financial institution regulated by the Reserve Bank of India. It is important to choose DDP to get registered as FPI. 

2. Appoint a Tax adviser: 

A tax advisor will help the investor to comply with all Tax obligations that will arise from your activities in India. It is very much required for the investor to know about the tax obligations on him for the smooth running of functions. The tax adviser advises whether the tax involved is reasonable or not.

 3. Appoint a Domestic Custodian:

Appointing a domestic custodian before making any investments in India is a very important step. A domestic Custodian can be any entity registered according to the norms set by SEBI to carry on the activity of providing custodial services in respect of securities.

4. Appoint a designated Bank:

After the registration is done under an FPI it is important to appoint a Designated Bank.  The Designated Bank has a duty to open and maintain a foreign currency account and/or a Non-Resident Special Rupee Account. Designated Bank means any bank in India which has been given permission by the Reserve Bank of India to act as a banker to FPIs.

5. Appoint a trading member: 

A Trading member has the duty to execute trades for the FPI. An FPI can have multiple TM’s.

6. Appoint a clearing member: 

The clearing member does the confirmation of trades. Clearing through a single clearing member. 

7. Appointment of a Compliance Officer

Every FPI is required to appoint a compliance officer who shall be responsible for looking after the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc. issued by the Board or the Central Government.

Impact of Foreign Portfolio Investment

Globalization has turned the world into a small village. The integration of economies of the world has led to the free flow of ideas, resources, people, and funds. Speaking of funds there is an enormous need for foreign investment in developing countries like India. India lacks funds, it has low infrastructural facilities and a huge population, keeping in mind these factors Foreign Portfolio Investment is a boon to the Indian Economy. It provides the investors with required profits, a huge market, labour at a cheap cost and so on. The capital account of India’s Balance of Payment consists of both FDI and FPI. FPI is one of the major sources of foreign capital in India. India requires this foreign capital for its growth and development. An inflow of foreign capital helps in removing a deficit in the balance of payment. Foreign investment has the ability to meet the gap in management, entrepreneurship, technology and skill. The developing countries need these resources that are transferred to the local country through various training programmes. Further, foreign companies bring with them advanced technological knowledge about production processes while transferring modern machinery equipment to the capital-poor developing countries.

Conclusion

Integration of the economies of the world has started a new era of setting and broadening business in different countries through Foreign Direct Investment and Foreign Portfolio Investment. These investments have acted as a boon for the development of those countries where investment is made. To regulate such activities of investment laws are required to safeguard the rights of target countries. FPI Regulation of 2019 has widened the scope of investment and also eliminated certain limits on investors that earlier prevailed. For a developing country like India, foreign capital is a much-needed thing to develop its economy. India is making efforts to keep its economy open to the world yet protected from completely vanquishing its true nature.   

---

References

1. www.sebi.gov.in › legal › regulations SEBI | Securities and Exchange Board of India (Foreign fastlegal.in › academy › securities-law Foreign Portfolio Investor (FPI) Registration In India

This article is written by Rishita Vekta, B.A.LLB(H) 2nd Year, from Lloyd Law College, Greater Noida U.P.

-Report by Lynda Mayengbam

The Securities and Exchange Board of India v. Rajkumar Nagpal is an appeal filed in response to the single judge’s ruling on October 28, 2021, which stated that the case concerned a Debenture Trust Agreement between the parties as
issuers and trustees of Debenture Trustees, respectively. The 17 debenture holders had filed a lawsuit to defend their rights and the amount due to them. The case was filed before the Bombay High Court on July 1, 2021.

FACTS

Reliance Commercial Finance Limited as ‘Issuer’ and Vistra ITCL as ‘Debenture Trustee’ executed a Debenture Trust Deed on 3rd May 2017. In response to the first default committed by RCFL, Vistra wrote to SEBI to inform them of the
actions it had taken in its status as Debenture Trustee and to request guidance about the ICA and its implementing mechanisms.

In a circular titled “Standardization of procedure to be followed by Debenture Trustee(s) in case of “Default” by Issuers of Listed Debt Securities,” SEBI published information on October 13, 2020. (“SEBI Circular”). The Plaintiffs, who are 17 Debenture Holders, filed a lawsuit in Bombay High Court on July 1, 2021, seeking an order to restrain RCFL, BoB, and RBI from executing the RBI Circular.

The court ruled that the SEBI circular did not govern the debenture trust deeds and that it could not be allowed to apply retrospectively. The SEBI circular will not precede any of the debenture trust deeds’ specific provisions. Therefore, SEBI challenged the order passed by the Single Judge’s order of the Bombay High Court and submitted an appeal.

RESPONDENT’S ARGUMENTS

The respondents contended that SEBI is not a party to the lawsuit, hence SEBI cannot be deemed an aggrieved party. Any order approving a merger scheme under Section 391 of the 2013 Companies Act is not subjected to appeal by SEBI. The SEBI Circular does not apply to this case because it does not include a scenario in which the holders of the debentures would reach a compromise, settlement, or agreement with the debenture issuer. Given that the SEBI circular has a retrospective application, SEBI’s appeal cannot be upheld. As in Principles of Statutory Interpretation by Justice G.P. Singh, it stated that

‘ The rule against retrospective construction does not apply to a statute merely because a part of the requisites for its action is drawn from a time antecedent to its passing.

APPELLANT’S ARGUMENTS

The Appellant contended that following Section 13 of the Commercial Courts Act of 2015, this appeal has been submitted as according to Section 13 (1A), “Any person aggrieved” by a decision or order of the Commercial, the
Commercial Appellate Division may hear the appeal. Due to specific remarks made by the Ld. Single Judge in the impugned orders to the effect that the ruling will not set a precedent against SEBI, SEBI’s statutory right to initiate an appeal cannot be revoked. The SEBI Circular makes no mention of its application to defaults that occurred before October 13, 2020. Lawfully, any legislation—delegated or otherwise—is regarded as prospective unless it has been
explicitly or obliquely given retrospective effect. If a debt cannot be settled through the compromise or settlement method, SEBI contends that debenture holders are entitled to receive the whole amount that is owed (principal and
interest). The argument, however, is that the solution reached in accordance with the Division Bench’s directive will also bind all the other debenture holders, who weren’t involved in the initial lawsuit brought before the High Court.

COURT’S DECISION

It was held by the hon’ble court that

i. There is no bar to the civil court’s jurisdiction
ii. The SEBI Circular is applicable if debenture holders wish to implement a Resolution Plan to which the lenders are a party
iii. Dissenting ISIN level debenture holders are bound by the ICA /Resolution Plan
iv. The SEBI Circular has retroactive application

For dissenting debenture holders in the present case the court observed:

“The dissenting debenture holders would have been bound by the Resolution Plan if it had been approved in accordance with the Insolvency and Bankruptcy Code, 2016 or under an ICA as acceded to under the SEBI Circular. We accordingly deem it appropriate that dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan. Alternatively, the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender‘s ICA and pursue other legal means to recover their entitled dues.”

The appeal was allowed in part, subject to the directions issued in the judgment under Article 142 of the Constitution.