The Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 have replaced the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulators 2014. This Blog Post captures highlights of the 2019 Norms.
Recategorization of Foreign Portfolio Investors
The Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2014 enumerated three categories of Foreign Portfolio Investors ("FPIs"). The new norms have streamlined these categories and bifurcated FPIs into two, rather than three categories.
Category I FPI includes the following applicants
Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled or at least 75% directly or indirectly owned by such Government or Government related investor(s).
Pension Funds and university funds.
Appropriately regulated entities such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisors, portfolio managers, broker-dealers and swap dealers.
Entities from the Financial Action Task Force ("FATF") countries which are i. appropriately regulated funds, ii. unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI. (Provided, that the investment manager undertakes the responsibility of all the acts of commission or omission of such unregulated funds); and iii. university-related endowments of such universities that have been in existence for more than five years.
An entity (i) whose investment manager is from a FATF member country and such investment manager is registered as a Category I foreign portfolio investor; or (ii) which is at least seventy-five per cent owned, directly or indirectly by another entity, eligible under sub-clause (ii), (iii) and (iv) of clause (a) of this Regulation and such an eligible entity is from a FATF member country: Provided that such investment manager or eligible entity undertakes the responsibility of all the acts of commission or omission of the applicants seeking registration under this sub-clause.
Category II FPI includes the following applicants
Appropriately regulated funds not eligible as Category I FPI;
Endowments and foundations;
Appropriately regulated entities investing on behalf of their client, as per the conditions specified by the Board from time to time.
Unregulated funds in the form of limited partnership and trusts.
Notably, an International Financial Services Centre shall be deemed to be appropriately regulated
Issue of Offshore Derivative Instruments are only permitted if they are issued by Category I FPI to entities eligible to be registered as Category I FPIs.
The permissible scope of investment
Shares, debentures and warrants issued by a body corporate, listed or to be listed on a recognized stock exchange in India
Units of schemes launched by mutual funds under Chapter V, VI-A and VI-B of the SEBI (Mutual Fund) Regulations 1996
Units of schemes floated by a Collective Investment Scheme in accordance with the Securities and Exchange Board of India (Collective Investment Schemes) Regulations 1999.
Derivatives traded on a recognized stock exchange
Units of real estate investment trusts, infrastructure investment trusts and units of Category III of Alternative Investment funds registered with the Board
Indian Depository Receipts
Any debt securities or other instruments as permitted by the RBI for FPI to invest in from time to time; and
Such other instruments as specified by the board from time to time.
Restrictions on Investment by FPIs
Broad-based criteria which required at least twenty investors to establish a fund has been removed.
Off-market transfer of securities is hereby permitted.
Ease of KYC norms.
Code of Conduct has been prescribed under Regulation 23 read with Schedule III.
Investor Group clubbing
The 2014 Regulations discussed the concept of layers in FPI contexts by considering such ownership to be opaque. The new norms have struck this down to provide a clearer picture of how the regulator perceives an investor group and when clubbing of investment limits would be triggered.
Regulation 22(3) provides that multiple entities registered as foreign portfolio investors and directly or indirectly, having common ownership of more than fifty per cent or common control, shall be treated as part of the same investor group and the investment limits of all such entries shall be clubbed at the investment limit as applicable to a single foreign portfolio investor.
The consequence of such clubbing triggers the requirement to divest and on failure to thereof, the investment would trigger application Foreign Direct Investment norms. However, this would not apply where (a) the FPIs are appropriately regulated public retail funds, (b) the FPIs are public retail funds where the majority is owned by appropriately regulated public retail fund on look-through basis; or (c) FPIs are public retail funds and investment managers of such FPIs are appropriately regulated.
 Appropriately regulated entity means an entity which is regulated by the securities market regulator or the banking regulator of home jurisdiction or otherwise in the same capacity in which it proposes to make investments in India
 Public retail funds means -
(a) a mutual fund or unit trusts which are open for subscription to retail investors and which do not have specific investor type requirements like accredited investors;
(b) insurance companies where segregated portfolio with one to one correlation with a single investor is not maintained; and
(c) pension funds.