Regulation 7(5) of the Securities Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (FPI Regulations) mandates that Foreign Portfolio Investors (FPIs) are required to have a valid registration certificate for FPIs to hold Indian securities or derivatives. However, on June 3, 2024, the Securities and Exchange Board of India (SEBI) notified the SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2019 (Amendment Regulations) which permit FPIs not holding valid registration certificate to either sell the securities held by them or wind up their open position in derivatives within a period of 360 (three hundred and sixty) days from the date of commencement of the Amendment Regulations.
The amendments were followed by a detailed framework on handling of securities by FPIs post expiry of their registration issued by SEBI in its circular dated June 5, 2024 (SEBI Circular).
Other key highlights of the Amendment Regulations and SEBI Circular:
- The SEBI Circular stipulates a period of 180 (one hundred and eighty) days from the date of issuance of the said circular for sale of unsold securities without any financial disincentive. However, if the sale is implemented during an additional period of 180 (one hundred and eighty) days, then such sale would be subject to a financial disincentive of 5% (five percent) of the sale proceeds and the custodian would be responsible to deduct this financial disincentive and deposit the same in the Investor Protection and Education Fund (IPEF) within 30 (thirty) days from deduction.
- If securities held by FPIs remain unsold after 360 (three hundred and sixty) days, the investments held by the FPIs would be deemed to have been compulsorily written off and consequently FPIs will lose any beneficial interest in these holdings including voting rights in such securities.
- All securities deemed to have been written off by FPIs will need to be transferred to a separate escrow account managed by brokers empaneled with the concerned stock exchanges. Custodians are required to deposit proceeds from the sale of such unsold securities into the IPEF.
- FPIs wishing to continue with their registration are required to pay registration fees for every period of 3 (three) years before the beginning of such period. In case registration fee along with the applicable late fee has not been paid by any FPI within 30 (thirty) days from the expiry of the aforesaid 3 (three) year period (i.e. the reactivation period), such FPI is permitted to sell off the securities held by it or wind up its open position in derivatives within 180 (one hundred and eighty) days from the reactivation period. No fresh investments can be made by such FPI during the reactivation period.
- Sale of securities may be undertaken until expiry of existing registration or within 180 (one hundred and eighty) days from date of notification of change in classification by the FPI to the designated depository participant (DDP) / change in compliant jurisdiction, whichever is later in instances of (i) reclassification of an FPI and (ii) change in compliant jurisdiction of an FPI.
On June 5, 2024, SEBI has notified various matters which may be construed as ‘Type I’ material changes and ‘Type II’ material changes. Upon occurrence of a Type I material change, FPIs are required to notify the same to the DDP and/or SEBI and seek fresh registration within 7 (seven) days from such change (no fresh purchase of securities can be undertaken by FPIs until it obtains a fresh registration certificate). Type II material changes are required to be notified to the DDP and/or SEBI within 30 (thirty) days from such change. Type I material changes inter-alia include change in compliant jurisdiction, change in classification of an FPI, change in name in the event of a merger, demerger or change in ownership and acquisition/merger/demerger resulting in cessation of operations of an FPI. Type II material changes are any material changes other than Type I material changes.
Conclusion
The Amendment Regulations effectively address the operational difficulties faced by FPIs and provide a more balanced approach to achieve liquidity for unsold investments.