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Mumbai, May 30 SEBI’s amendments to its FII regulations, which were notified on May 22, are in essence meant to discourage sub accounts and tighten conditions for issuance of Offshore Derivative Instruments (ODIs) , while encouraging foreign funds to come upfront and register themselves as FIIs, said legal experts. The amendments also lay emphasis on establishing the identity of foreign entities investing in India. Having said that, the amendments have also relaxed conditions for registration as FIIs, throwing the arena open to a whole lot of entities, said an official with a law firm, who tracks regulatory developments. For one, a newly-established fund can now apply to be registered as an FII, provided the track record of the investment manager of the fund, who has promoted it, is taken into consideration. Earlier, the fund itself had to have a track record. The other relaxation is that university funds, endowment funds, charitable trusts and societies may be considered for registration as FIIs, even if they are not regulated by any foreign regulatory authority. KYC norms for registering sub accounts and for ODI issuances are a key feature of the amendments. Also, “sub account” has now been defined in a more focussed way, rather than in the “inclusive” way earlier, said legal experts. A sub account is now “any person resident outside India, on whose behalf investments are proposed to be made in India by a foreign institutional investor and who is registered as a sub account under these regulations.” FIIs can issue ODIs only to persons regulated by an appropriate foreign regulatory authority; and only after compliance with Know Your Client norms. Earlier, these conditions were not explicit, what was a qualification has now become a precondition for issuance of ODIs, said a legal analyst. Unregulated entitiesODIs already issued to unregulated entities have to be wound up by March 31, 2009. ODIs with underlying Indian derivatives (which are now not allowed at all) that have already been issued must be wound up by March 2009. Also no sub accounts can issue ODIs from May 22. Regulation and registration become twin conditions for issue of ODIs; and what is a regulated entity is also defined, noted experts. “Persons regulated by an appropriate foreign regulatory authority” are now “any person that is regulated /supervised and licensed/registered by a foreign central bank; Any person that is registered by a securities or futures regulator in any foreign country or state.”
It could also be “any broad based fund or portfolio incorporated or established outside India or proprietary fund of a registered FII or university fund, endowment, foundation, charitable trust or charitable society whose investments are managed by a person covered under either of the above two clauses”. What is a broadbased fund has also been modified. Whereas earlier a broad based fund could have one entity investing 10 per cent in the fund, an entity can now have 49 per cent in a fund so that even as few as three persons can come together and constitute a fund. NRIs are not eligible to apply as sub accounts, according to the new amendments. Whether OCBs can invest or not has been subtly dropped, noted analysts. This indicates that OCBs can now apply to be sub accounts. (The earlier proviso, that NRIs and OCBs registered with RBI cannot apply as sub accounts, has been done away with.) The new amendments allow FIIs to invest in Collective Investment Schemes. The new networth required for registration, at $ 2 billion for foreign corporates and of $ 50 million for foreign individual is a bit steep, said experts. Asset management companies, investment manager/advisor, institutional portfolio manager set up or owned by NRIs shall be eligible to be registered as FII subject to the condition that they shall not invest their proprietary funds. More Stories on : Regulatory Bodies & Rulings | Foreign Institutional Investors | Stock Markets
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