HR Khan Working Group on FPI

• 25 May 2019

The Securities and Exchange Board (SEBI) released the report of the working group formed under the chairmanship of former RBI deputy governor HR Khan last year.

• The report stated that international investors are a key source of capital to the Indian economy and hence it is important to ensure a harmonised and hassle-free investment experience for international investors and improve transparency as economic regulations evolve.
• Against this background, the group’s primary objectives were consolidation, simplification, rationalisation and liberalisation of the Foreign Portfolio Investment framework.

Key recommendations

• To streamline the regulations to encourage foreign inflows in the Indian market, the Group has proposed fast track on-boarding procedure for investors, apart from a simplified registration process.
• The group has recommended pension funds to be considered for Category I Foreign Portfolio Investors (FPIs) registration, removal of opaque structure and the review of broad-based conditions for appropriately regulated entities.
• It has proposed a liberalised investment cap under a review of prohibited sectors for foreign investment for FPIs, restriction on Sovereign Wealth Funds (SWFs) for investment in corporate debt securities, and permitting FPIs for off-market transactions.
• The Committee has also proposed alignment of regulations for FPIs and Alternative Investment Funds (AIFs) and the harmonisation between investment restrictions in FPI regulations and Foreign Exchange Management Act (FEMA).
• In terms of restrictions on FPI investments in mutual funds, the group recommended for further deliberations on whether such restrictions should be there.

NOTE: FPIs are currently not permitted to invest in liquid and money market mutual fund schemes.

Categories of Foreign Portfolio Investors (FPIs)

• Category I (Low Risk) which would include Government and entities like Foreign Central banks, Sovereign Wealth Funds, Multilateral Organizations etc.
• Category II FPIs largely include regulated institutions, persons, broad-based funds and university, pension and endowment funds.
• Category III (High Risk) which would include all other FPIs not eligible to be included in the above two categories.

Alternative Investment Fund (AIF)

• AIF is any privately pooled investment fund in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP) which are not presently covered by any Regulation of SEBI governing fund management nor coming under the direct regulation of any other sectoral regulators in India-IRDA, PFRDA, RBI.
• Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
• Categories of AIF:
  
  • Category I AIFs are those AIFs which generally invests in start-ups or early stage ventures which the government or regulators consider as socially or economically desirable. Eg: Venture capital funds (Including Angel Funds), SME Funds.
  • Category II AIFs do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Eg: real estate funds, private equity funds.
  • Categories III AIFs employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Eg: hedge funds, Private Investment in Public Equity Funds.