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  • Foreign Institutional Investors,Foreign Institutional Investors, Foreign Venture Capital Investors An Overview

    Conference on the Foreign Exchange Management Act, 1999 - WIRC ICAI

    CA. Shabbir Motorwala20 August 2011, Mumbai

  • ContentsC i FDI FII d FVCI I Comparative FDI, FII and FVCI Investment framework

    FII :

    Overview

    Eligibility

    Application Process

    Regulatory framework

    FVCI :

    Overview

    Eli ibilit Eligibility

    Application Process

    Regulatory framework Regulatory framework

    Qualified Foreign Investors

    22

  • Brief Overview of India Foreign Investment Framework

    SEBI* approved Foreign Venture Capital Fund (FVCF)

    SEBI*registered Foreign Institutional Investors (FII)@

    Foreign Direct Investments (FDI) into Indian Company

    Suitable entry mode for strategic and management control

    Suitable entry mode for portfolio / capital investments and secondary market operations

    Suitable entry mode for project specific investment in unlisted companies / VCF

    Category of Investors Typical Investment Option Entrepreneur Investment FDI Private Equity FDI / FII / FVCFPrivate Equity FDI / FII / FVCF

    Fixed income FII / FVCF

    Real Estate FDI / FVCFInstitutional investment FIIInstitutional investment FII

    @ Apart from shares / convertible debentures in an Indian Listed Company on recognized stock market, FIIs can also invest in Dated Government Securities, Treasury Bills, etc

    * Securities and Exchange Board of Indiag

    FII and FVCI are also allowed to invest in an Indian Company under the FDI Scheme

    FII and FVCI are treated on par with FDI as Foreign Investments for Indirect FDI in Downstream Investments

    3

    FII and FVCI are not eligible investors for FDI in LLP currently permitted under the Approval Route

  • Key legal / regulatory matrix for FII and FVCI

    FII / FVCI

    SEBI FEMA FDI Policy Income Tax SEBI Act, 1992

    FII SEBI (FII) Regulations, 1995

    FEMA (Transfer or Issue of Security by a Person Resident Outside India)

    Consolidated FDI Policy (Issued half yearly)

    The Income-tax Act,1961

    Double Taxation

    FVCI - SEBI (FVCI) Regulations, 2000

    SEBI (Custodial of

    Outside India) Regulations, 2000 (FEMA 20)

    Master Circular on

    Press Notes Avoidance Agreements, as may be applicable

    SEBI (Custodial of Securities) Regulations, 1996

    SEBI (ICDR)

    Master Circular on Foreign Investments in India

    Circulars/ press SEBI (ICDR) Regulations, 2009

    Securities Contracts (Regulation) Act 1956

    preleases issued from time to time

    4

    (Regulation) Act, 1956

  • Foreign Institution Investors

  • FIIs General framework

    FIIs

    An eligible institution set- up or incorporated outside India which invests in Indian listed shares / securities post

    FII / Sub Accountp

    registration with SEBI as per prescribed guidelines / framework

    Approval India

    Overseas

    SEBI (single window clearance) and concurrence of Reserve Bank of India (RBI) in case the applicant is a Bank or its subsidiary Local

    C t di / Tax

    FIIs registered with SEBI as:

    Investor: For self investment in Indian shares / securities

    Custodian/ Banker

    Tax Advisor

    Broker Manager: Investment is done on behalf of their eligible clients

    ( Clients registered as Sub-accounts of FIIs with SEBI)

    Bank Accounts permitted in IndiaStock

    Exchange in p

    Non-interest bearing foreign currency account; and / or

    Single non-interest bearing special non-resident rupee t (SNRR)

    India

    6

    account (SNRR)

  • FIIs - Eligibility

    Entities eligible to be registered as FIIs

    Pension fund, Mutual fund, Investment trust, Insurance company, Re-insurance company

    Foreign Government Agency / Foreign Central Bank / International or Multilateral Organization or an Agency thereof / Sovereign Wealth Fund

    A t t B k I tit ti l tf li I t t M Ad i Asset management company, Bank or Institutional portfolio manager, Investment Manager or Advisor set-up or incorporated outside India intending to make investments in India on behalf of broad-based funds and its proprietary funds

    Trustee of a Trust set-up outside India intending to make investments in India on behalf of broad-based funds and its proprietary funds

    University fund, Endowment, Foundation or Charitable trust, Charitable society (also refer slide no. 10)y y ( )

    Broad-Based Fund: A fund established or incorporated outside India, having at least 20 investors with no single individual investor holding more than 49 percent of the shares or units of the fund

    - If the Broad-Based Fund has Institutional investor(s) - 20 investors not required

    - If the Broad-Based Fund has an Institutional investor holding more than 49 percent of the shares or units in the fund, the Institutional investor must itself be a Broad-Based Fund

    7

    ,

  • FIIs - Sub-account Eligibility

    Entities eligible as Sub-account Broad-Based Fund or portfolio which is broad based Proprietar f nd of the FII Proprietary fund of the FII An eligible Foreign Corporate

    Listed on any Overseas Stock Exchangey g

    Asset based of atleast USD 2 Bn

    Average Net Profit of atleast USD 50 Mn in three preceding financial years

    Eligible Foreign Individuals not being Non-Resident Indians Net-worth of at least USD 50 million

    Foreign passport for at least preceding five years Foreign passport for at least preceding five years

    holds a certificate of good standing from a bank

    Client of the FII or its Group Entities for at least three preceding years

    University fund, Endowment, Foundation, Charitable trust or Charitable society also refer slide no. 10

    Sovereign Wealth Fund (as per application Form)

    8

    Sovereign Wealth Fund (as per application Form)

  • FIIs - Application Process and General Steps

    Step 1 Appoint a SEBI registered Custodian, Designated Banker and Tax Advisor (Note: Custodian and Banker could be same)

    Step 5 For F&O segment, open a Derivatives Margin account and appoint a Clearing Member, etc

    Step 2 Application to SEBI in Form A with accompanying documents and applicable fees

    Step 6 - The custodian, on behalf of the FII/Sub-account, applies for various codes, such as Unique Client Codes and Custodialfees

    Step 3 SEBI Approval (four to eight weeks) in Form B - For Banks or its subsidiaries applying for

    as Unique Client Codes and Custodial Participant Codes for BSE / NSE, etc

    Step 7 Start Investing / Operating pp y gFII status, SEBI seems to seek comments from RBI before grant of registration resulting in higher timeframe

    Step 8 Reporting by Custodian (daily) / monitoring of ceilings, etc.

    Registration is permanent unless cancelled or suspended by SEBI

    Step 9 Renewal fees payable to SEBI every three years

    Step 4 Obtaining PAN, Opening of Bank Account, Demat Account, etc of FII by / through Custodian or Tax Advisors

    9

  • FIIs - Consideration of Application by SEBI

    Track record, professional competence, financial soundness, experience, and general reputation of fairness and integrity

    For Newly established funds the track record of the yinvestment manager (who are promoters) considered

    Details of Foreign Regulatory Authority governing the FII Fit and Proper criteria Fit and Proper criteria Interest of development of securities market In case of University fund, Endowment, Foundation, Charitable

    trusts or Charitable society;

    - It exists at least for 5 years

    - It is permitted to invest in securities outside the country of itsIt is permitted to invest in securities outside the country of its incorporation or establishment

    - It is registered with any statutory authority in the country of their incorporation or establishment

    - Details of any legal proceeding initiated by any statutory authority against the Applicant

    - Serving of Public Interest by the Applicant

    10

    - Serving of Public Interest by the Applicant

  • FIIs Investment in shares / convertible debentures on Recognized Stock Exchange through Registered Broker Investment ceiling for each FII / their each Sub-account (to be monitored by Custodian)

    - Upto 10% of the total issued / paid-up capital (or each series of convertible debentures) of an Indian company p y

    - If sub-account registered under Foreign Corporate / Individuals category, then it can invest upto 5% of the total paid-up capital (or each series of convertible debentures) of an Indian company

    Overall FII Investment Limits for all FIIs and their Sub accounts (monitored by RBI) Overall FII Investment Limits for all FIIs and their Sub-accounts (monitored by RBI) - Upto 24% of the total paid-up capital (or each series of convertible debentures) of an Indian company

    (20% in the case of public sector banks as per FDI policy)

    - The above ceiling can be raised by the Indian Investee Company up to the sectoral limit under FDI guidelines if a resolution is passed by its Board of Directors followed by a special resolution in its General Body Meeting

    Earlier RBI FAQ required intimation to RBI for above increase latest RBI Master Circular on Foreign- Earlier RBI FAQ required intimation to RBI for above increase, latest RBI Master Circular on Foreign Investment dated 1 July 2011 suggests prior RBI approval for such increase

    As per the new Consolidated FDI Policy Framework (effective from 1 April 2011) and the Latest RBI Master Circu