Market regulator Securities and Exchange Board of India (Sebi) today cleared the decks to move to a new and simpler investment regime for foreign portfolio investment in the country.

Sebi's board, which met today here, approved the draft Sebi Foreign Portfolio Investors (FPI) Regulations, 2013, to replace the existing two decade old Sebi Foreign Institutional Investors (FII) Regulations.

Under the new system the existing two investor classes---FIIs and qualified foreign investors (QFIs)--will be merged into a single investment class to be called FPIs. Unlike earlier, FPIs won't have to register with the market regulator directly.

Experts have said the new rules though have been made simpler for foreign investors but their sentiment may not change until economic conditions improve.

“Some thorns have been taken out but we are not offering any flowers. Sentiment will improve when there is a revival in economic growth and corporate earnings improve,” said Sandeep Parekh, founder, Finsec Law Advisors, who termed the new regulations as simplified.

“Prima facie there is no new obligation created. The new rules shouldn't be disruptive,” he added.

“The Sebi FPI Regulations, 2013 have been framed keeping in view the provisions of Sebi FII Regulations, 1995, QFI framework and the recommendations of the “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments,” Sebi said in a press release today.

Sebi has said the existing FIIs and sub accounts can continue to operate under the FPI regime, however QFIs will have to obtain FPI registration within one year.

Suresh V Swamy, Executive Director, Tax & Regulatory Services, at PricewaterhouseCoopers said that the additional time will help QFIs to transition smoothly from the QFI regime to the FPI regime.

“There will need to be some clarification on the responsibilities of the custodian when it comes to taxation. The local custodian is treated as a ‘representative assesse’ in respect of tax payable by the QFI. In case of FIIs, they only have to make sure that proper taxes have been discharged by the FIIs.” he said.

Sebi has also said FPIs will have to ensure participatory notes (p-notes) are issued only to entities that are regulated by “appropriate foreign regulatory authority”.

The know your customer (KYC) requirement for FPIs has also been eased by Sebi, depending upon the profile. Systematically important institutions like foreign central banks, sovereign wealth funds, to be classified as 'category I' investors, will have little documentation. Category II FPIs, which include mutual funds, insurance companies and pension funds, will also have easier KYC documents, while it will be stricter for corporate bodies, individuals and trusts, who will come under category III.

Designated depositary participant (DDP) will be the new link between FPIs and Sebi going forward. DDPs will have to do the FPI registration with Sebi and will also have to perform some regulatory functions like identifying the end beneficiaries and other due diligence. (Business Standard)