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H R Khan Committee – New FPI Norms

Why in News?
Based on a report prepared by the H R Khan Committee, SEBI has recently eased the Foreign Portfolio Norms (FPI) in the country. As per the Experts, this easing of norms is set to give a major boost to the overseas investment in India.

Requirements for FPI Eased

  • The Security and Exchange Board of India (SEBI), has eased the FPI norms in order to simplify and quicken the registration of FPI processes in India
  • Based on the H R Khan Committee Report, the FPI regulations have been redrafted in a way that the FPIs would no longer require to meet the broad-basing criteria, under which atleast 20 investors were required to establish a fund.
  • KYC requirements are simplified for the FPIs and off-market transfer of securities are also permitted now.
  • Under the renewed guidelines, FPIs will be classified into 2 categories instead of 3:

Category 1: Government and Government related entities like the Central Bank, sovereign wealth funds and multilateral or international organizations.

Category 2: Mutual funds, insurance companies and investment trusts. Also includes regulated persons such as banks, asset management companies etc.

  • The offshore funds floated by the Indian mutual funds will be permitted to invest in the domestic markets under the FPI route.
  • To attract more overseas investment in the Indian market, the Central Banks which are not member of the Bank for International Settlement will be eligible for registration as FPIs.

H R Khan Committee

  • Citing concerns over the SEBI norms for FPIs, both the investors and FPIs wanted the norms to be reviewed.
  • FPIs has the apprehension that the norms will have restrictions on the investment. But any such fear was talked done by SEBI.
  • In accordance, SEBI constituted the H R Khan Committee to review the FPI norms and concerns raised by the investors.
  • The committee placed all its recommendations into four categories: FPI Registration process, KYC and documentation, investment permission and limits and other aspects.
  • According to the committee, the OCIs and NRIs will be allowed to for holding a non-controlling stakes in the FPIs and no restriction or penalties will be imposed on them for managing such stakes. NPIS will be to invest in the FPIs id the single holding is under 25% and group holding under 50% in the fund.
  • A time frame of 6 months to be provided for the compliance with the new norms after the finalization and the non-compliant investors will be provided another 6 months to reconcile their existing positions.
  • New norms and rules will be equally applied to the investors using the Participatory Notes (P-notes).

Advantages with the new norms

  • Uniform regime for all portfolio investors.
  • Previous norms had no norms for NRIs, but this proposals will bring them under the surveillance of SEBI. The investments from NRIs can now be properly reported and monitored.
  • Relaxing the broad based criteria will bring to the country a whole new range of entities and will open up the FPIs. It will also account for the framework for the issuance of the P-Notes.

Since the Union Budget, the overseas investors have pulled out over $3 billion from the Indian domestic market and hence the easing down of the FPIs comes as a fresh lease of life to the domestic markets. The FPIs in India had been down in lieu of numerous issues in the past few months and the move will be a much needed boost to it.

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