India: SEBI To Decide On The K.M Chandrasekhar Committee Report On Simplifying The Foreign Portfolio Investment Regime

In a move to encourage and simplify foreign portfolio investment regimes, the Securities and Exchanges Board of India ("SEBI"), in line with the announcement by the Finance Minister in his Budget 2013 speech1, has released the list of major recommendations of the Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments ("Committee"). The Committee was constituted to study the convergence of the various portfolio investment regimes. While the complete report submitted by the Committee ("Committee Report") is yet to be disclosed, the key recommendations of the Committee have been announced vide a press release by the SEBI.2 We thought it fit to apprise you of the development and analyze some of these recommendations to the extent they have been released. SEBI will take a decision on the recommendations of the Committee in its next Board meeting on June 25, 2013. Our analysis on the Committee Report will follow.


The Board of the SEBI had, in its meeting held on October 6, 2012, decided to harmonize/rationalize, and thereby, ease the entry routes for various foreign portfolio investors into India. The aim was to prepare a uniform guideline for various categories of investors such as Foreign Institutional Investors ("FIIs"), Foreign Venture Capital Investors ("FVCIs"), Non Resident Indians ("NRIs"), Qualified Foreign Investors ("QFIs"), etc. based on the guidance of the Working Group on Foreign Investment in India, i.e., the U.K. Sinha Committee.

To implement this decision, the Committee was formed under the Chairmanship of K.M Chandrasekhar and consisted of representatives from the Government of India ("GoI"), the Reserve Bank of India ("RBI") and various market participants.


A new investor class, "Foreign Portfolio Investor" ("FPI"), to replace FIIs and QFIs. Existing FIIs, their sub accounts and QFIs to be merged into FPIs.

2.NRIs and FVCIs to be retained as classes of investors for the present with no change in investment limits prescribed for NRIs. However, the limit of nine sectors for the FVCIs to be expanded or replaced by a negative list to be announced by GoI.

3. The aggregate investment limit of FPIs to be 24% (being the present default aggregate limit for FIIs, which can be raised by the company up to the sectoral cap).

4. Portfolio investments to be defined as investment by any single investor or investor group, which shall not exceed 10% of the equity of an Indian company. Any investment beyond the threshold of 10% to be considered as FDI.

5. Prior direct registration of FIIs and sub accounts with SEBI to be done away with and instead, FPIs to register themselves with and transact through Designated Depository Participants ("DDPs").

6. Know Your Client ("KYC") checks to be based on risk categorization of FPIs, with documents needed for registration and onboarding being the simplest for Category I and the most stringent for Category III:

Government and Government-related entities such as Foreign Central Banks, Sovereign Wealth Funds, Multilateral Organizations, etc. to be classified as Category I (Low Risk) FPIs;

Regulated entities such as Banks, Asset Management Companies, Broad Based Funds such as Mutual Funds, Investment Trusts, Insurance and Reinsurance Companies, University Funds, Pension Funds and University related Endowments already registered with SEBI to be classified as Category II (Moderate Risk) FPIs.

All other FPIs not eligible to be included in the above two Categories to be classified as Category III (High Risk) FPIs.

Requirement of submitting personal identification documents such as copy of passport, photograph etc. of the designated officials of FPIs belonging to Category I and Category II to be done away with. SEBI to separately prescribe the documentation needed for the 3 Categories.

7. FPIs belonging to the Category III to be not allowed to issue Offshore Derivative Instruments ("ODI")/Participatory Notes ("PN").


While it may be too soon to comment on the recommendations, especially in the absence of access to the complete Committee Report, a preliminary analysis of the press release yields the following takeaways.

1. With the investment limits of FPIs being capped at 24% and QFIs being merged into FPIs, the existing foreign investors classified as QFIs would be entitled to the benefit of higher investment limits from the current prescribed limits of 5% (individually) and 10% (in aggregate).

2.The report of the U.K. Sinha Committee ("UKS Report") had suggested that all classes of portfolio investments, namely, FIIs, sub accounts, FVCIs and NRIs be abolished as investor classes and be merged into the then-proposed 'qualified foreign investor' or QFI regime. Nishith Desai Associates had suggested to SEBI on the UKS Report to treat the FVCI regime differently from portfolio investment. The Committee seems to have taken cognizance of the industry demands and has recommended the retention of the NRI and FVCI classes. The retention of the FVCI regime also manifests the recognition of FVCIs as growth partners. Not only has the route been retained, the Committee has recommended expanding the sectors in which FVCIs are permitted to invest in.

3. The Committee's recommendation is that prior direct registration of FIIs and sub-accounts with SEBI be done away with and that FPIs be able to register themselves with and transact through DDPs. Not only will this ease the process of entry and investment for foreign portfolio investors and reduce the timeline involved in initiating investments by portfolio investors, it will also lead to a disintermediated platform, wherein FIIs would earlier be treated as intermediaries for investments by virtue of their registrations with SEBI. This recommendation also appears to be in line with that of the UKS Report.

4. The introduction of the definition of 'portfolio investments' and its basis being on the extent of shareholding, rather than class of investors or investment in listed securities, is a move in line with UKS Report. The Committee has also referred to the concept of 'investor group' in the context of portfolio investments which has not been defined. It remains to be seen whether the Ultimate Beneficial Ownership test under the present QFI regime will be the benchmark for 'investor group' or not, but the intent seems to prevent an FPI investor from taking indirect benefit of larger shareholding without being qualified as FDI.

We understand that the 10% threshold for classification as 'portfolio investments' may be based on the same reasoning provided under the UKS Report i.e., it is the standard OECD distinction and practice as well of peer countries such as Brazil, South Korea, South Africa and Turkey which have comparably sized domestic markets and democratic governance.3

5.It would be of interest to see the situations where portfolio investments exceed 10% at some time and become FDI. On an attendant note, how investments made as FDI falling below 10% would be treated as, if such investments have extended degree of control, will have to be examined. The Committee has apparently discussed this and the thought process on such transitions will be detailed in the Committee Report.

6. The Committee has adopted a risk based approach and has segregated FPIs into 3 Categories allocating its risk assessment with each such Category. We may, however, need to understand further as to the investment entities that would be included in Category III. Category III FPIs, akin to current QFIs and sub accounts, will not be allowed to issue participatory notes, which is largely in line with the extant regime.

7. The press release does not make a mention of the responsibilities of DDPs to withhold tax under the FPI regime. This may be relevant for greater clarity in the roles of the DDPs. Under the QFI regime, Qualified Depository Participants ("QDPs") were assigned the responsibility to act as a single point of contact for all purposes including withholding tax. QDPs would be responsible for any withholding tax in India before remitting returns to QFIs. However, under the present FII regime, FIIs themselves were responsible for all tax obligations on all remittances made.


The recommendations of the Committee seem to be a positive move towards simplifying the foreign investment norms in India. However, the devil is in the detail. Such a broad change of regulations with respect to foreign investment into India would need to be done with utmost care. At a time when the country needs further foreign investments to meet its fiscal deficit, changes should be carried out with minimum disruption to the market and taking into account the views of the all participants in the market, most importantly the foreign investors. While the move to rationalize the KYC requirement to a risk based model will be welcomed by all, other changes will be keenly watched by all participants. Key questions that arise will be whether distinction of investment in listed/unlisted securities for FII/FDI investors has been done away with, since currently FII investors are not allowed to purchase unlisted securities and FDI investors are not allowed to purchase listed securities on the floor of the exchange; whether QDPs will be allowed to merely transfer their QDP license for a DDP license or will have to apply fresh; the grace period that SEBI will allow for transition of the regime; recognition of existing KYCs of clients of FIIs for the new regime etc. This list is based merely on the press release. The release of the Committee Report and SEBI's adoption of the Committee Report and the ensuing regulation may raise its own list of questions that will need to be debated, discussed and addressed for a successful transition. We look forward to the release of the Committee Report.


1.The full text of the Budget 2013-2014 speech can be accessed here

2. The press release by SEBI can be accessed here

3. UKS Report,, pages 77 to 81

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Nikhil Joseph
Ruchir Sinha
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions