Govt mulls simple norms, strict scrutiny on foreign funds

The move could facilitate direct investments by both individual and institutional entities abroad into Indian equity and debt markets, as against the current practice of coming through FIIs, venture capital and private equity funds.

However, foreign investors would need to face stringent scrutiny before being allowed to invest in Indian capital markets as per the proposal, on which the Finance Ministry is seeking feedback from key financial sector regulators such as Sebi and RBI, sources said.

The proposals would have no bearing on the FDI (Foreign Direct Investment) norms and would only apply to the portfolio investments, or those coming into the capital markets. While flow of foreign investments into Indian markets have been robust over past few years, a tedious and complex process has been often criticized for coming in way of the optimal level of overseas fund flow into the country.

The proposed measures, expected to be announced in the union budget later this month, would focus on simplify the process of foreign investment in capital markets and avoid uncertainty, delay or unequal treatment with regard to various investor classes, sources said.

At the same time, the proposals would put a strong emphasis on KYC (know your customer) norms for these investors to thwart any possibility of illicit wealth coming into the Indian markets, they added. The measures are also being considered for allowing foreign entities, both individual and institutional, to invest in capital markets here without setting shops here.

Instead, they would be allowed to invest in India after registering with the Indian depository participants present in their respective counties.The proposed measures are largely based on recommendations made by a high-powered working group last year on steps required for attracting foreign investments.

The panel, incidentally headed by U K Sinha who has now been given charge as Chairman of capital market regulator Sebi, had proposed that the foreign investors should not be categorised in different classes like FIIs, FVCIs or NRIs and a common set of regulations be formed for them. Among others, the Sinha panel had suggested a single window for registration and clearance of portfolio investment regulations, without distinguishing between investor classes.

Seeking the abolition of foreign institutional investors (FIIs), FVCIs (foreign venture capital investors) and NRIs (nor-resident Indians) as separate investor classes, the panel favoured a single investor class to be known as 'Qualified Foreign Investors (QFIs)'.

While the government is unlikely to remove the NRIs as a separate investor class, the other classes could be merged into a single one, sources said. To facilitate the direct investment by overseas entities, the Indian DPs would be encouraged to expand globally by setting up branches or entering into agency relationships with authorised entities in foreign countries.

However, these DPs would be required to follow stringed KYC norms, as prescribed by RBI, Sebi and other regulatory authorities, for registering foreign entities as clients.
Besides, Sebi and all other regulators would be entitled to seek any further details from these investors, whenever they consider it necessary for their surveillance and investigative actions.

As per the proposed measures, any foreign investor would first need to provide all the KYC documents to the DP branch or agency in that country and the same would be forwarded to the parent entity in India. After consulting the foreign investment norms of RBI and Sebi applicable to that particular foreign entity, the DP in India would facilitate opening of accounts with a bank and a stock broker. The bank and broker would perform their own KYC checks on the documents provided by the investor.