SEBI Eases Foreign Investment Rules

6/28/2013
India's securities regulator announced changes Tuesday to rules that it said would make investing into Indian assets less cumbersome for foreigners.

The changes by the Securities and Exchange Board of India harmonize investment guidelines for foreign investors of different sizes, and relax identity verification requirements for them.

The steps come at a time when foreign investors have been pulling money out of India and other emerging markets to chase higher yields in the U.S. after the U.S. Federal Reserve indicated that it could start tapering its monetary stimulus soon.

Tuesday, SEBI said entry norms for foreign investors will be simplified and made uniform as it merges existing investor categories.

Overseas investors will be merged into a new investor class to be termed as Foreign Portfolio Investors, the regulator said in a news release after the board meeting. The three existing categories were Foreign Institutional Investors, Sub-Accounts and Qualified Foreign Investors, which spanned from large institutions such as mutual funds, pension funds and endowments to foreign retail investors.

The SEBI also said that it had done away with a rule requiring foreign investors to register directly with it. Instead, investors will have to register with their Indian depository agents, who hold securities on investors' behalf.

"Know-Your-Client norms were a reason why many investors gave India a pass because the requirements were too rigorous," said Suresh Swamy, a Mumbai-based executive director at consultancy firm PricewaterhouseCoopers.

"These are definitely positive steps. We are likely to see a lot more interest from foreign investors," Mr. Swamy said.

SEBI said portfolio investments by an investor or an investor group, if it exceeds 10% of the equity of a company, will be considered as Foreign Direct Investment.

India relies heavily on foreign investment to fund its current account gap, which widened to a record 6.7% of gross domestic product in the October-December quarter, according to the latest data from the central bank.

The outflow of foreign funds has taken its toll on the Indian rupee, which was changing hands at 59.66 to the dollar in late Asian trade Tuesday, not far from its record low of 59.97.

In June so far, foreigners have pulled out $1.143 billion from Indian stocks, making it the first time in 2013 that monthly equity investments turned negative, according to SEBI data.

The regulator also tightened rules for founders of companies buying back shares. Founders now need to ensure that they use up at least 50% of the money kept aside for share buybacks.

At present, the minimum stands at 25%.

Companies that fail to meet this rule will have to forfeit 2.5% of the money they set aside for the share buyback.
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