Legalaxy - Monthly Newsletter Series - Vol XIV - July 2024

SEBI (FOREIGN PORTFOLIO INVESTORS) (AMENDMENT) REGULATIONS, 2024 – NOTIFIED

Securities and Exchange Board of India ("SEBI"), in its Master Circular for Foreign Portfolio Investors ("FPIs"), Designated Depository Participants ("DDP") and Eligible Foreign Investors dated May 30, 2024 ("FPI Master Circular"), specifies the guidelines for registration of FPIs and the investment conditions/restrictions on FPIs under Part A and Part C of the FPI Master Circular, respectively. The FPI Master Circular also sets out the timelines for disclosure of certain material changes/events.

SEBI, vide its notification dated May 31, 2024, has amended the SEBI (FPI) Regulations, 2019 ("FPI Regulations"), by notifying the SEBI (FPI) (Amendment) Regulations, 2024 ("FPI Amendment Regulations") effective from June 3, 2024. The FPI Regulations have been amended to inter alia: (a) provide flexibility to FPIs in dealing with their securities post expiry of their registration; and (b) to relax the timelines for disclosure of material changes/events and other obligations by FPIs.

The following are the key amendments to the FPI Regulations:

1. Regulation 7 of the FPI Regulations deals with 'certificate of registration' and has been revised as follows:
   1. FPIs holding securities or derivatives in India whose certificate of registration is not valid as on the date of the commencement of the FPI Amendment Regulations, shall be allowed to sell such securities or wind up their open position in derivatives within 360 days from the date of commencement of the FPI Amendment Regulations.
   2. The registration fees, mentioned in Part A of the Second Schedule to the FPI Regulations, has to be paid by FPIs for every block of 3 years, before the beginning of such block. However, the FPIs shall be considered to have paid the said registration fees in the event they pay the same along with the late fee (provided in Part A of the Second Schedule to the FPI Regulations) within a period of 30 days from the date of expiry of the preceding block. In the event, the FPIs do not pay the required registration fee and the late fee and continues to hold securities or derivatives in India, it would be allowed to sell such securities or wind up their open position in derivatives in India within 360 days from the date of expiry of the aforementioned 30 days, under such terms and conditions and in such manner as may be specified by SEBI, from time to time.
   3. FPIs whose certificate of registration is not valid and has not sold off the securities or wound-up their open position in derivatives in India as per the FPI Amendment Regulations will be deemed to have written off the securities in the manner specified by SEBI.
2. Prior to the FPI Amendment Regulations, the timeline for an FPI to disclose material changes/events was "as soon as possible but not later than 7 working days". This timeline has now been omitted.
3. Part A of the Second Schedule to the FPI Regulations has been revised to provide that the late fees payable, wherever applicable, by FPIs will be US$ 50 per day for Category I and US$ 5 per day for Category II FPIs.

Pursuant to the FPI Amendment Regulations, SEBI, vide its circular dated June 5, 2024 ("FPI Registration Expiry Circular"), has addressed the framework for providing flexibility to FPIs regarding their securities after the expiry of their registration thereby amending the FPI Master Circular. Certain key amendments are as follows:

1. Continuance of registration: The procedures for FPIs, who wish to continue their registration for the subsequent block of 3 years, including the submission of fees and updates to their information, has been laid down. FPIs failing to meet these requirements within the specified timelines may face restrictions on further purchases until registration continuance is confirmed. The re-activation of registration of FPIs is subject to FPIs complying with applicable Know Your Customer ("KYC") and Anti-Money Laundering/ Countering the Financing of Terrorism requirements.
2. Reclassification: Provisions for reclassification of FPIs under different categories/subcategories in cases of non-compliance with applicable eligibility requirements have been introduced. If an FPI registered under a particular category/sub-category fails to comply with applicable eligibility requirements, it shall notify this change to its DDP to be reclassified under appropriate category/sub-category. FPI may be required to provide to the DDP with additional KYC documents, as applicable. It also stipulates restrictions on fresh purchases for non-compliant FPIs until additional KYC requirements are met, although FPIs can continue to sell securities already purchased by it within the specified timeframe.
3. Change in status of a compliant jurisdiction: There is a prohibition on fresh purchases by FPIs from non-compliant jurisdictions (as provided in the FPI Registration Expiry Circular) until the regulations have been complied with. However, FPIs can continue to sell securities already purchased by it until expiry of its existing registration block or 180 days from the date of change in status of the jurisdiction, whichever is later.
4. Dealing with securities written-off / deemed to have been written-off: Securities written-off by the FPIs are to be transferred to escrow accounts operated by exchange empanelled brokers, with proceeds from the sale transferred to Investor Protection and Education Fund ("SEBI-IPEF"). Stock exchanges are tasked with monitoring the disposal process and reporting on securities held in escrow accounts. Provisions in this regard shall come into effect after 60 days from the date of FPI Registration Expiry Circular.

SEBI, vide its circular dated June 5, 2024 ("FPI Material Changes Circular"), has laid down the timelines for intimation of material changes and submission of supporting documents for different types of material changes by FPIs. The FPI Material Changes Circular provides for the following modifications in the FPI Master Circular:

1. Classification of 'material change' into 2 types:
   1. 'Type I' material changes include critical material changes that:
      • render FPIs ineligible for registration;
      • require FPIs to seek fresh registration;
      • render FPIs ineligible to make fresh purchase of securities;
      • impact any privileges available or granted to FPIs, like the privileges enjoyed by FPIs in their capacity of qualified institutional buyers; and
      • impact any exemptions available or granted to FPIs under the extant regulatory framework.
   2. 'Type II' material changes, i.e., any material changes other than those considered as 'Type I' material changes. Deletion of sub-fund/share classes/equivalent structure that invests in India, shall be considered a 'Type II' material change.

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