FPIs Look Up for the Approval of a New Route to Investment

Foreigners are awaiting the Securities and Exchange Board of India’s (SEBI) response to enjoy relaxed norms on foreign portfolio investor (FPI). The relaxation brings in a new investment route related to participatory notes (P-Notes) as per the recommendations of the HR Khan-led committee.

Many foreign investors would not want to register themselves with SEBI. Therefore, the committee suggests allowing private banks to invest through individual accounts on behalf of their clients. It results in foreigners investing in India through SEBI-registered foreign banks.

In 2017, SEBI let private banks to invest on behalf of their clients only if they held a standard portfolio for all their clients. Since the banks were not allowed to create a customised portfolio for individuals, the system failed.

To offer customised portfolios, private banks must register themselves as Category III FPIs instead of their current Category II FPI registration.

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Experts in the field have appreciated the idea and stated that the concept has the potential to attract foreign funds who would like to share a small part of their portfolio to Indian securities.

A decisive edge to this new proposal is the Know Your Customer (KYC) norms. When a person invests through a private bank, the investors must adhere to KYC as per their home country.

On the contrary, investing under P-Note demands adherence to KYC documentation according to Indian Anti-Money Laundering (AML) laws.

Also, the data shared will stay with the global custodians rather than being submitted to the SEBI as in the case of P-Notes. This solves the data privacy concerns of the investors.

A former senior employee of SEBI mentioned that the disclosure of the ultimate beneficiary may or may not be needed. That is, only the details of a front entity can suffice, concealing the actual recipient.

To balance the flexibility offered on KYC, the committee recommends that custodians must submit the ownership details of the clients once every quarter. Nevertheless, it is said that there are possibilities to misuse the route.