New norms: On regulations for foreign investors

On regulations for foreign investors

SEBI’s liberalized norms for FPIs will make Indian markets attractive to foreign investors 

Background:

  • In the union budget, the finance minister levied a higher tax surcharge on those having the taxable income of 2 to 5 crore, and over 5 crore
  • For those between taxable income of 2 to 5 crore, the surcharges had been raised from 15 percent to 25 percent. Similarly, it had been increased from 35.88 percent to 39 percent for those having a taxable income over 5 crore.
  • As a result, FPIs have been withdrawing from equities in the Indian market.  FPIs have sold shares of worth $3.07 billion in the last two months.

Foreign Investment in India

  • Foreign investment is simply investing in a foreign land by an individual or company. It is very desired as it enhances the growth of an economy. Foreign investment is classified into two categories:
  • Foreign Direct Investment: Foreign Direct Investment – FDI – refers to the establishment of direct business interest by controlling the ownership of the business in a foreign country by a company which is based in another country. The ownership is in ‘direct’ control of the foreign-based entity.  For example Manufacturing businesses.
  • Foreign Direct Investments are considered very beneficial for the economy as these are long term investments by majorly venture capital firms and multinational companies. 
  • Foreign Portfolio Investment:  Foreign Portfolio Investment – FPI – involves the investment of financial assets of a foreign country in the form of bonds and stocks which is held by a foreign investor. Since stocks investments are relatively temporary in nature, Foreign Portfolio Investments are not considered as good as Foreign Direct Investment.

The Role of Foreign Investment in India:

  • Capital is one of the most fundamental requirements in the development of a country. The role of foreign investment comes into play when a country is unable to meet its total required the expenditure which happens to be the case with most counties.
  • Both FDI and FPI can play a crucial role in the growth of a developing economy. Their involvement is measured in percentage of the share that they hold in a particular company. 
  • Unlike the External Commercial Borrowings, the receiving country holds no payment obligations, hence they are characterised as non-debt creating. In India, foreign companies are generally benefitted by factors like low labour wages and tax exemptions in investment, in return apart from capital inflow, we achieve new technical knowledge and employment. 
  • According to the data by the Department of Promotion of Industry and Trade, the FDI equity inflow in the year 2018-19 was over 44 billion US dollars.

How is the FPI regulated? 

FPI is mainly regulated by the following three entities:

Ministry of Finance (MoF) – Government of India

  • The Ministry of Finance makes policies relating to taxation, capital markets and financial legislation. Various measures are continuously undertaken by the ministry to facilitate foreign investment.

Securities and Exchange Board of India (SEBI)

  • The Securities and Exchange Board of India (SEBI) is established under the SEBI Act, 1992 and is a regulatory authority. Capital markets are mainly regulated by SEBI.
  • FPIs are required to register with SEBI to enter into security markets of India. The classification and Know-Your-Customer of FPIs is also done according to the SEBI norms and regulations.
  • SEBI also regulates buyback norms. Buyback is the process when the share issuing company repurchases its own shares. In the process, it provides market value of its shares to the shareholders and retakes the ownership which was previously distributed to public and private players.
  • FPI has been characterized in three categories based on the amount of risk. These are: Low-Risk Category (Foreign Central Banks, Sovereign Wealth Funds etc.); Medium Risk Category (Mutual Funds, Insurance Companies, Banks etc); and High-Risk Category (all other FPIs).

Reserve Bank of India (RBI)

  • The RBI  works for the development of financial markets through different legislations. Foreign Exchange Management Act, 1999 is the most important legislation in that regard. 

Changes in FPI regulation norms:

  • On Wednesday, SEBI undertook steps to ease the compliance and regulatory framework based on the recommendations of H.R. Khan committee. It broadened the classification and the registration process is simplified by removing the broad eligibility criteria which previously required certain documents and at least 20 investors in a particular foreign fund.
  • The buyback norms are relaxed for those firms which own NBFCs (non-banking financial companies) and HFCs (housing finance companies).
  • The FPIs are now allowed to sell their share in off-market sales. Further, the restrictions relating to the sales are reduced. 
  • SEBI took off the concept of Category-3 FPI. There will only be two categories of FPIs now.
  • From now on those entities which are registered at international finance service centre will automatically qualify as FPIs. 
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