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Foreign Portfolio Investors (FPIs)Foreign Portfolio Investors (FPIs)

GS Paper 3

 Syllabus: Indian Economy and issues relating to Planning, Mobilisation of Resources

 Source: TH

 Context: The Securities and Exchange Board of India (SEBI) has proposed additional disclosures from Foreign Portfolio Investors (FPIs).

FPI vs FDI (Foreign direct investment):

 FPIFDI
Distinguishing featuresDoes not give investors direct ownership of a company’s assets.Direct control/ownership in a business.
Definition of FPI and FDI as per Arvind Mayaram Committee (2014)FPI results in an investor controlling less than 10% of the shares of the company.FDI results in an investor controlling more than/equal to 10% of the shares of the company.

FPI regulation in India:

  • FPIs are registered with SEBI and can invest in Indian securities as per the regulations prescribed by SEBI.
  • The Foreign Exchange Management Act 1999 (FEMA) is the primary legislation governing FPI in India and has been amended several times to liberalise FPI regulations in India.

 

What are SEBI’s new proposals?

  • The proposed legislation categorises FPIs into low risk, moderate risk and high risk.
  • The low risk would cover government and government-related entities such as central banks or sovereign wealth funds.
  • Moderate risk refers to pension funds or public retail funds with widespread and dispersed investors.
  • All other FPIs are categorised as high-risk.

  

Proposals for high-risk FPIs:

  • Additional disclosure requirements for high-risk FPIs holding more than 50% of their equity asset under management (AUM) in a single corporate group.
  • The existing high-risk FPIs with an overall holding in the Indian equity market of over Rs 25,000 crore comply with the disclosure mandate within six months.
    • Failing this, they would have to bring down their holding within the threshold.

 

Exceptions:

  • New FPIs that have just begun investments would be allowed to breach the threshold criteria for up to a period of six months.
  • ‘Moderate risk’ FPIs, whose India-oriented holdings are relatively small in comparison to their global portfolio, are not subjected to additional disclosure requirements.

 

Need of the proposed regulations:

  • Potential misuse of the FPI route for circumventing Press Note 3 stipulations (2020) that required an entity sharing a land border with India to involve in FPI only via the government route.
  • Concentrated group investments by FPIs to bypass regulatory requirements (such as that for minimum public shareholding).

 

Significance of the proposed regulations:

  • They would try to identify tangible ownership and curtail incidences of multiple routes.
  • This would enhance transparency and help avert regulatory requirements, and keep up with the minimum (25%) public shareholding norms.

 

Concerns: A detract from ease-of-doing investments.

 

Insta Links:

What FPIs’ market exit means

 

Mains Links:

Justify the need for FDI for the development of the Indian economy. Why is there a gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (UPSC 2016)

  

Prelims Links: (UPSC 2017)

Which of the following is the most likely consequence of implementing the ‘Unified Payments Interface (UPI)’?

  1. Mobile wallets will not be necessary for online payments.
  2. Digital currency will totally replace physical currency in about two decades.
  3. FDI inflows will drastically increase.
  4. The direct transfer of subsidies to poor people will become very effective.

 

Ans: 1