The Securities and Exchange Board of India (Sebi) has introduced welcome changes for foreign portfolio investors (FPI) in its new Sebi (FPI) Regulations 2019, read with its operational guidelines. The key changes include elimination of broadbased requirement, elimination of declarations relating to opaque structures, reduction in FPI categories from three to two.
An important change allows appropriately-regulated private banks, merchant banks, broker dealers and swap dealers to invest on behalf of their clients – individuals and family offices.
Earlier, private banks and merchant banks were eligible to invest only their proprietary funds as FPIs and investment on behalf of their clients was not permitted. Around February, 2018, Sebi allowed such entities to invest on behalf of their clients by separately registering a collective investment vehicle, which satisfies the broadbased criteria (20 investors).
These conditions were found restrictive by investors. In pursuant to the comments from the HR Khan Committee and industry representations, Sebi has now allowed investment on behalf of client without imposing the broadbased condition.
Thus, where a regulated private bank will be granted Category-I registration for its proprietary funds, a separate registration needs to be obtained to make investments on behalf of its clients. A key issue arises here: Will Sebi grant one registration for all client investments or will it require separate FPI registrations for each client or pool of clients? The Sebi regulations and guidelines seem to be silent on this aspect.
Looking at the manner in which client-related information needs to be submitted, and considering that only the broadbased criteria has been removed, and not the ‘pooled vehicle’ criteria, one may tend to think that only one registration can be obtained for all clients.
Accordingly, a common bank and demat account for all client-related investments must be maintained. So, private banks will have to maintain internal allocation of client-wise investments, incomes, losses and taxes. However, since there will be one registration, it may give rise to significant issues such as the need for compulsory set-off of losses against gains, clubbing of incomes from different portfolio of securities acquired for different clients /investors, difficulty in availing treaty benefits for eligible clients, etc.
One way of resolving this could be to make changes in the tax law to acknowledge clients having separate strategies as different taxpayers under a single FPI licence, where otherwise they would be regarded as a single legal entity for tax purposes.
Alternatively, to reflect accurate segregated affairs of each client or smaller pool of clients as per their unique objective, it will be prudent to obtain client-wise PAN and file separate returns of income. To facilitate this, Sebi could grant flexibility to investors to choose whichever way they wish to obtain registration – as individual or together. It may be useful for Sebi to clarify this aspect to help investors to better plan their affairs and benefit from the new opportunity.