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Facts About Foreign Asset Management

2020 marks the start of a new landscape in the field of investments and asset management, globally. As per a report published by PriceWaterhouseCoopers called the Asset Management landscape in 2020, the following key points were mentioned.

Some of the important facts that mark the Foreign Asset Management industry in India are as below.

  1. The limit of Foreign Direct Investment in the Aviation and the Insurance industries is all set to increase. In January 2020, the Foreign Ministry proposed increasing the limit from the existing 49% to 74%.
  2. The Indian Foreign Ministry is also proposing to introduce 100% Foreign Direct Investment in conventional government strongholds like Railways. In the education industry and rental housing management industry too, FDI is being considered to be increased to 100%.
  3. The news is that the Central Government is keen to tap the potential of the private investors, especially foreign investors to strengthen the Indian economy that, economists fear is going to slow down if the government does not bring in sound financial policies.

Talks are that with the opening up of FDI limits, the way to sell the country’s debt-ridden national carrier Air India will be paved while similar plans are also there for other state-owned entities like Bharat Petroleum and the Shipping Corporation of India.

In February 2020, the Mutual Funds and the AMC industry witnessed two important changes – one, the expense ratio was brought down and second, the regulations pertaining to product pricing and classification were made transparent that are at par with the global standards and on the lines of developed economies of the world. The PWC Report, mentioned above, took note of this aspect, on a global level. It says that non-compliance will no longer work in 2020 and transparency will be the key differentiator for success and growth.

SEBI’s Foreign Portfolio Investors (FPI) Regulations announced in September 2019

Superseding the FPIs of 2014, The Security Exchange of India announced the New FPIs in September 2019. Some of the prime changes are mentioned here.

  1. The FPIs have now been segregated into two distinct categories –
  1. Category I are the low-risk investors. This category is regulated to a greater extent and generally includes government related investors. Pension Funds, University Funds, Insurance activities, Asset Management companies, and Financial Action Task Force member countries’ have all been included now under this category; they were all earlier in the Category II FPI.
  2. Category II are medium-risk investors. This is a category that is associated with lesser regulations, but comparatively higher risks.
  1. All regulated funds and unregulated funds that are registered as Category I FPI from Financial Action Task Force (FATF) member countries are now considered under Category I FPI.
  2. University endowments that are more than five years old are also Category I FPI.
  3. Entities that have a FATF investment manager and are registered as a Category I FPI are also a Category I FPI from now on.
  4. Also, an entity that has 75% investment from another entity from a FATF member country is also a Category I FPI.
  5. Only such companies that are registered with the International Financial Services Centre or IFSC can register as FPI.
  6. FPIs that are in Category II and are well regulated or investors like charitable organizations, corporates, individuals, family-owned companies, regulated entities and unregulated funds like trusts and limited partnership will have restrictions on investment.
  7. Category III FPIs have not been included under the new recategorization.
  8. Foreign investors and funds that wish to invest in the Indian securities market need to be first incorporated.
  9. The investment range has been brought to be at par with the regulations of the Reserve Bank of India. As per the revised range, the investment needs to be 10% of total paid-up equity capital, diluted from ten percent of the total capital issued.

SEBI has also made the process of registration of FPIs simpler and faster. The objective is to improve the foreign portfolio investments in the country.

Important takeaways from the latest policy changes indicate that the foreign investors need to ensure that they are licensed as Foreign Portfolio investors that needs to be obtained from a SEBI-approved custodian.

There are numerous benefits that entities can look forward to in order to take advantage of the latest recategorization.

  1. With the recategorization, FPIs can now look at taking advantage of exemptions that result from transfer of shares that Category I and Category II FPIs are entitled to.
  2. With recategorization, FPIs can now qualify as Qualified Institutional Buyers (QIBs). Earlier the ones in Category III did not get the advantage of being QIBs which meant that they had no right to become anchor investors during primary issues of companies in India. They could also not invest in qualified institutional placements earlier.
  3. Category III FPIs that have now moved to Category II FPIs have higher limits now because of the recategorization.
  4. The KYC (Know Your Customer) requirements are now lower for the companies that were earlier Category III FPIs and are now Category II FPIs.

Another noteworthy impact is the removal of the broad-based criteria that was mandatory earlier to quality as a Category II FPI. Regulated funds that are non-broad-based from FATF member countries will be considered as Category I FPI. Unlike the broad-based criteria where the number of investors played an important role, now under recategorization, FPI categorization is based on the country of residence and the regulated status of the entity. Also, compliance obligations that were earlier mandatory under broad-basing is no longer valid now.

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