India should simplify foreign investment rules, open more sectors to VC - committee
India should encourage investment by foreign portfolio investors by scaling back the regulatory apparatus used to register and monitor inbound capital flows, according to a high-level committee. It also recommended expanding the number of sector open to foreign venture capital firms.
The committee, headed by K.M. Chandrasekhar, a former top bureaucrat, was formed to review the monitoring of foreign portfolio investments. These are defined as passive investments that do not exceed 10% of a target company's equity. Anything above this threshold is considered foreign direct investment.
The committee's report - submitted to Securities and Exchange Board of India (SEBI) this week - proposes creating a single class of investor known as the foreign portfolio investor (FPI). This would replace foreign institutional investors (FIIs), sub accounts and qualified foreign investors (QFIs), a category for foreign individuals or trusts.
Rather than register directly with SEBI, FPIs would be able to register themselves with and transact through designated depository participants. The aggregate investment limit for this category would be 24%, which is the same as the present default aggregate limit for FIIs.
The report recommends that two classes of overseas investors - foreign venture capital investors (FVCIs) and non-resident Indian investors (NRIs) - should remain separate. However, FVCIs, currently restricted to nine sectors, should be able to invest more widely.
For verification purposes, FPIs would be placed into three categories, based on their risk profile, each subject to a different level of registration requirements.
Category one comprises low-risk investors - government and government-related entities such as foreign central banks, sovereign wealth funds, and multilateral organizations.
Regulated entities would fall under moderate-risk category two - banks, asset management companies, mutual funds, investment trusts, insurance and reinsurance companies, university funds, pension funds and university related endowments.
All other FPIs would be included in high-risk category three. They would be prohibited from issuing offshore derivative instruments and participatory notes.
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