What are the RBI guidelines for an FII to invest in India?
While presenting the Budget for 1992-93, the Finance Minister Dr. Manmohan Singh have been told that decision to allow reputed foreign investors, such as Pension Funds etc., to invest in India capital market. To operationally this policy announcement, it has become necessary to develop guidelines for such investments by Foreign Institutional Investors (FIIs).
Delhi Stock Exchange
The following guidelines have been formulated with this regard.
- Foreign Institutional Investors (FIIs) including institutions such as Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and Incorporated/Institutional Portfolio Managers or their authority of attorney holders (providing discretionary and non-discretionary portfolio management services) and non-discretionary portfolio management services) would be welcome to make investments under these guidelines.
- FIIs would be greeting to invest in all the securities traded on the Primary and Secondary markets, including the equity and other securities/instruments of companies which are listed/to be listed on the Stock Exchanges in India including the OTC Exchange of India. This would include shares, debentures, warrants, and the schemes floated by domestic Mutual Funds. Government may like to add further categories of securities later from time to time.
- FIIs would be compulsory to obtain an initial registration with Securities and Exchange Board of India (SEBI), the nodal regulatory agency for securities markets, before any investment is made by them in the Securities of companies listed on the Stock Exchanges in India, in agreement with these guidelines. Nominee companies, affiliates and subsidiary companies of a FII will be greeted as separate FIIs for registration, and may seek break up registration with SEBI.
- In view of the fact that there are foreign exchange controls also in force, for various permissions under exchange control, along with their application for initial registration, FIIs shall also file with SEBI another application addressed to RBI for seeking various permissions under FERA, in a format that would be specified by RBI for this purpose. RBI's general permission would be obtained by SEBI before granting initial registration and RBI's FERA permission together by SEBI, under a single casement approach.
- For surrendering registration to the FII, SEBI shall take into account the track record of the FII, its professional competence, financial soundness, experience and such other criteria that may be considered by SEBI to be relevant. Moreover, FII seeking initial registration with SEBI shall be required to hold a registration from the Securities Commission, or the regulatory organization for the stock market in the country of domicile/incorporation of the FII.
- SEBI's initial registration would be applicable for five years. RBI's general permission under FERA to the FII will also hold fine for five years. Both will be renewable for comparable five year periods later on.
- RBI's universal permission under FERA would enable the registered FII to buy, sell and realize capital gains on investments made through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest on all recognized stock exchanges through a designated bank branch, and to appoint a domestic Custodian for guardianship of investments held.
- Open foreign currency denominated its accounts in a designated bank. (There can even be more than one account in the same bank branch each designated in different foreign currencies, if it is so compulsory by FII for its operational purposes);
- Open a special non-resident rupee account to which might be credited all receipts from the capital inflows, sale proceeds of shares, dividends and interests;
- Transfer sums from the foreign currency accounts to the rupee account and vice-versa, which will be at the market rate of exchange;
- Always try to Make investments in the securities in India out of the balances in the rupee account;
- Transfer reparable (after tax) proceed from the rupee account to the foreign currency account(s);
- Repatriate the capital, capital gains, dividends, incomes conventional by way of interest, etc. and any compensation received towards sale/renouncement of rights offerings of shares subject to the designated branch of a bank/the custodian being authorized to deduct with holding tax on capital gains and arranging to pay such tax and remitting the net proceed at market rates of exchange;
- Register FII's holdings without any further authorization under FERA.
- There would be no constraint on the volume of investment minimum or maximum-for the purpose of entry of FIIs, in the primary/secondary market. Also, there would be no lock-in-period prearranged for the purposes of such investments made by FIIs. It is predictable that the differential in the rates of taxation of the long term capital gains and short term capital gains would automatically induce the FIIs to retain their investments as long term investments.
- Portfolio investments in primary or secondary markets will be subject to an upper limit of 30% of issued share capital for the total holdings of all registered FIIs, in any one company. The upper limit would apply to all holdings taking into account the conversions out of the fully and partly convertible debentures issued by the company. The holding of a single FII in any company would also be subject to an upper limit of 10% of total issued capital. For this reason, the holdings of an FII group will be counted as holdings of a single FII.
- The utmost holdings of 24% for all non-resident portfolio investments, including those of the registered FIIs, will also include NRI corporate and non-corporate investments, but will not include the subsequent :
- Foreign investments under financial collaborations which are permitted equal to 51% in all priority areas.
- Investments by FIIs through the following substitute routes:
- offshore single/regional funds;
- Global Depository Receipts;
- Euro convertibles
- Disinvestment will be acceptable only through stock exchange in India, including the OTC Exchange. In extraordinary cases, SEBI may permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where accessible.
- All secondary market operations would be only in the course of the recognized intermediaries on the Indian Stock Exchange, including OTC Exchange of India. A registered FII would be expected not to connect in any short selling in securities and to take delivery of purchased and provide delivery of sold securities.
- A registered FII can assign as Custodian an agency approved by SEBI to act as custodian of Securities and for confirmation of transactions in Securities, settlement of purchase and sale, and for information coverage. Such custodian shall ascertain separate accounts for detailing on a daily basis the investment capital utilization and securities held by each FII for which it is acting as custodian. The custodians will testimony to the RBI and SEBI semi-annually as part of its disclosure and reporting guidelines.
- The RBI shall make accessible to the designated bank branches a list of companies where no investment will be allowed on the basis of the upper prescribed upper limit of 30% having been reached under the portfolio investment scheme.
- Reserve Bank of India may at any time request by an order a registered FII to propose information regarding the records of utilization of the inward remittances of investment capital and the statement of securities transactions. Reserve Bank of India and/or SEBI may also at any time carry out a direct inspection of the records and accounting books of a registered FII.
- FIIs investing under this scheme will profit from a concessional tax administration of a flat rate tax of 20% on dividend and interest income and a tax rate of 10% on long term (one year or more) capital gains
Investment by FIIs in Debt securities
Subsequent of the announcement made by the Finance Minister to ease the restrictions on investment by FIIs in debt securities, the SEBI has permitted the necessary changes to the SEBI (Foreign Institutional Investors) Regulations, 1995. The most important features of the changes are as follows :
- Any FII or sub-account already registered with SEBI or to be registered would continue to be governed by the upper limit of 30% on debt instruments.
- In addition to this, any registered FII willing to make 100% investments in debt securities will be permitted to do so, focus to specific approval from SEBI as a separate category of FIIs or sub-accounts as 100% debt funds. In such cases, the restriction of 30% debt will not be relevant.
- FII investment in debt through the 100% debt route will be subject to an overall debt cap of US$ 1.0- 1.5 billion for investment by all FIIs mentioned in previous point.
- SEBI will impose individual upper limit on individual funds or sub-accounts. This upper limit will be based on the track record of the FII and its experience in managing debt funds in emerging markets and other objective criteria. Individual debt funds would be informed of the respective upper limit at the time of the registration/approval.
- Investments by FIIs through the 100% debt route would be acceptable only in debt securities of companies which are listed or to be listed.
- Investment by FIIs in debt securities through the 100% route would be permitted without any constraint on maturity of the debt securities invested in.
- Investment by FIIs in debt securities through the 100% route would be without any limit on investment in the debt securities of any fussy issues.
- The SEBI Board had earlier accepted changes to the FII regulations permitting investment by individual FIIs or sub- accounts of FIIs in upto 10% of the equity capital of investee companies, permitting investment in unlisted securities and including endowment funds in the qualified categories of FIIs. These changes have already come into effect on October 9, 1996 with their announcement in the Official Gazette.
RBI guidelines for FII investment in dated government securities
As a follow-up to the Government's decision to permit Foreign Institutional Investors (FIIs) to invest in dated Government Securities, the Reserve Bank of India has n the following notified guidelines for FIIs authorized to invest in dated Government Securities.
- For the reason of FII investment, dated government Securities would include dated securities of both Government of India and State Governments of all maturities, but would not consist of Treasury Bills.
- Investment in dated government Securities by FIIs may be made either in the primary market at the public sale /flotation or in the secondary market.
- Investment by FIIs in dated Government Securities should be undertaken all the way through designated banks, i.e. any bank in India which has been authorized by the Reserve Bank to act as a banker to Foreign Institutional Investors.
- Investment by FIIs will be permitted only in the form of Subsidiary General Ledger (SGL) Account through a bank having both SGL Account No. II (Constituents' Account) and current Account with the Reserve Bank of India.
- The secondary market transactions by FIIs will be allowable through recognized Indian Stock Exchanges or over the counter with SGL Account holders and will be governed by the Delivery Versus Payment system of the Reserve Bank of India.