January 31, 2012
The Government in India ("Government") has extended the reach of a Qualified Foreign Investor ("QFI") in India by permitting it to directly invest in equity shares of Indian companies listed on Indian stock exchanges. The Reserve Bank of India ("RBI") has issued guidelines to this effect on January 13, 2012 ("Guidelines").
The Government has issued the Guidelines in order to widen the non-resident investor base in the Indian stock market as well as to expand the category of non-resident portfolio investors in India.
Background
QFIs were permitted last year to invest in equity shares of Indian companies through mutual fund schemes in India. They are now permitted to directly invest in equity shares of Indian companies listed on Indian stock exchanges. Previously, only foreign institutional investors ("FIIs"), their sub-accounts and non-resident Indians ("NRIs") could directly invest in the equity of Indian companies.
QFIs are defined by the Government to include individuals, groups or associations, resident in a foreign country:
(a) that is compliant with the recommendations of the Financial Action Task Force (FATF); and
(b) the securities commission or financial regulator of which is a signatory to International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding.
Most major jurisdictions across the world, including China, members of the European Union, Japan, the United Kingdom and the United States of America, satisfy these requirements.
Guidelines
The RBI has granted general permission to QFIs for acquisition of equity shares in India by purchasing (i) equity shares of listed Indian companies through recognized brokers on recognized stock exchanges in India, and (ii) equity shares of Indian companies which are offered to the public in India generally. Consequently, QFIs can acquire listed equity shares through participation in rights issues or by way of bonus issues, stock splits/consolidation, amalgamation, demerger or similar corporate actions. QFIs are permitted to divest their shares either through trades on stock exchanges in India, participation in open offers (in both takeovers and delisting situations) and buy backs.
In order to invest, QFIs are required to open a dematerialisation account with a Depository Participant ("DP") registered with the Securities and Exchange Board of India ("SEBI"). Sale and purchase of equity by QFIs are allowed only through such an account. Each QFI can open only one dematerialization account irrespective of whether or not it is a joint account. In addition to this, each QFI is allowed to transact trades in equity through only one designated overseas bank account based in a country that satisfies the FATF and IOSCO requirements mentioned above.
The individual and aggregate investment ceilings for QFIs are 5% and 10% respectively of each class of equity shares of the paid up capital of the Indian company. These ceilings are separate from and in addition to those specified for investments in Indian equity by FIIs and NRIs.
SEBI Regulations
SEBI has issued a circular dated January 13, 2012 setting out the operational rules and customary Know-Your-Client (KYC) requirements in relation to investments by QFIs ("Circular"). The Circular primarily specifies operational norms for DPs with whom QFIs maintain their dematerialization accounts. The Circular also provides:
(a) SEBI, the Government and other regulatory agencies with the power to seek information, documents and records from QFIs regarding their activities as QFIs;
(b) that each QFI must keep its DP informed regarding any penalty, pending litigation or proceeding, finding of inspection or investigation for which action may have been taken or is in the process of being taken by an overseas regulator against the QFI; and
(c) that each DP must ensure that the equity shares held by QFIs (with an account with the DP) are free at all times from encumbrances, including pledges and liens.
Caution List
The Circular also specifies that depositories have to report to the RBI, the aggregate percentage of shares held by QFIs with respect to each class of equity shares in Indian companies. Where the aggregate percentage for a class of equity shares in a company exceeds 8% of the total equity shares of that class, the depository is required to put that class of equity shares on a caution list. This caution list is then to be communicated to all DPs and recognized stock exchanges. If the aggregate holding of QFIs falls below 8%, the relevant class of equity shares is to be removed from the caution list.
To hold any equity shares in the caution list, QFIs have to take prior approval from the relevant depository (through its DP). Where any trade by a QFI causes the aggregate holding of QFIs in a class of equity shares of a company to exceed 10%, the QFI is required to divest her/his/it’s holding (to the extent it exceeds the 10% limit) within three days of being informed by the depository that the trade has caused the aggregate holdings of QFIs to exceed the 10% limit.
Impact
QFIs will now be able to directly buy Indian equity shares, but the process to accomplish that is still far from being precise and straightforward.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you work or the following lawyers in the firm’s Singapore office:
Jai S. Pathak (+65 6507 3683, [email protected])
Priya Mehra (+65 6507 3671, [email protected])
Karthik A. Thiagarajan (+65 6507 3636, [email protected])
© 2012 Gibson, Dunn & Crutcher LLP
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