Clearer KYC rules urged for India's FPI regime

As India moves to simplify the documentation process for approving foreign investment into the country, local custodians are urging the country's securities regulator to provide greater detail on their roles.

Foreign investors seeking to trade Indian securities face a number of cumbersome tasks, including a lengthy registration process with the Securities and Exchange Board of India (Sebi) and the know-your-customer (KYC) assessment process.

Foreign investors wanting to invest or trade in India must work with both a custodian and the compliance divisions of brokers over KYC documentation, as well as identify verification procedures across various regulators and stock exchanges.

As such, foreign institutional investors (FIIs) and qualified foreign investors (QFIs) have aired grievances in the past.

In response, Indian finance minister P. Chidambaram said earlier this year the government was working towards simplifying the KYC process when approving foreign investors to invest in Indian securities, an important step for the country as it relies on foreign investment to help plug its fiscal deficit, which stood at 4.9 trillion rupees ($80.6 billion) at the end of March, according to Reuters.

Last week, a Sebi committee chaired by former cabinet secretary K. M. Chandrasekhar published a report on its foreign portfolio investment (FPI) regime, in its latest move to form an integrated regulatory framework for foreign investments.

One of the most significant changes under the proposed FPI scheme will be regulatory oversight – Sebi previously controlled the registration process, but once the FPI regime is implemented, the  process will be delegated to designated depository participants (DDPs), or qualified custodians.

As custodians will carry out due diligence and KYC documentation for FIIs and QFIs, they will have to invest more time, money and research into due diligence, argues Anand Rengarajan, Deutsche Bank’s head of direct securities services for India.

He also points out that as custodians will play a leading role in getting first-time foreign investors to put money to work in India, it's important that FPI has similar, strict guidelines for all custodians to deter prospective investors from shopping around for DDPs with less stringent rules.

“Clear responsibilities should be established for DDPs so that all market players will be competing on a level playing field,” says Rengarajan.

In addition to handing over the regulatory responsibilities to custodians, the new FPI programme will simplify the process of trading securities, notes Viraj Kulkarni, BNP Paribas Securities Services' head of securities services for India.

He previously pushed Sebi to waive the multiple-step process for QFIs to execute orders – which involved investors going through custodians before passing on to brokers. And in the most recent report, these constraints have been lifted, which should improve execution significantly, Kulkarni says.

The new regime also doubles the amount of equity a qualified foreign investor can purchase in a company to 10%, from 5% previously. Total foreign investment in one company is capped at 24%.

In addition, the FPI scheme groups foreign investors based on risk appetite – government and government-related entities are in the first, low-risk bucket; regulated investment managers, investment trusts and insurance firms are in the second; while endowments, charitable societies, family offices and others make up the third, high-risk group.