Important SEBI Regulations Related to FPI Demat Accounts

Estimated Reading Time: 6 minutes

Foreign investments are usually encouraged in any developing economy for lack of adequate investments from domestic sources. The Government requires funding for public works, welfare and infrastructure development. While the traditional source of income for any Government is through the taxes and cess levied, this may fall short of the overall requirements. Thus, foreign investments are sought in various forms such as through stock market investments, bonds, government securities etc.

Foreign Direct Investors (FDI) invest in a stake in a company of another country by direct ownership. Foreign Portfolio Investors (FPI) invest in the stock markets of other countries. FPIs have a short-term interest in investments. In India, FPIs invest in shares listed on the stock exchanges. These are also electronic transactions as dematerialisation has been implemented in the Indian economy. FPIs get advised on how to open demat account by experts at broking agencies. This includes information such as how to open demat account online, how to make share investments, how to make payments and track portfolios etc.

The investment environment has become more dynamic and open in the recent times. There is a rise in the number of smart investors with definite portfolio management plans to fulfil their financial goals. Similarly, foreign investors also have specific goals of investing in international markets. They only face issues in understanding the region-specific laws and regulations related to investments. When broking agencies advise them on how to open demat account and its working, they can then smoothly operate the account to fulfil investment goals. Here are some of the SEBI regulations related to demat accounts for FPIs:

  1. Multiple accounts: Foreign portfolio investors are permitted to hold multiple demat accounts in order to simplify trading into domestic companies. Different investments can be classified by the FPI investor according to asset classes or risk categories. Demat accounts can hold both stock and bond investments.
  2. Categorization norms: In India, FPIs are classified into three categories based on their risk profiles. Category I is called ‘Low Risk FPI’ as they invest in sovereign wealth funds, foreign central banks etc. Category II is called ‘Moderate Risk FPI’ as they invest in regulated bodies like banks, pension funds, insurance companies, asset management companies, mutual funds and universities. Category III is called ‘High Risk FPI’ as they invest in other funds which are not included in the previous two categories.
  3. KYC norms: In September 2018, SEBI revised the KYC guidelines for FPIs. FPIs in the II and III categories, have to maintain a list of beneficial owners. The beneficial owner is defined as the individual or entity controlling the  FPI investment. FPIs can be controlled by NRIs (Non-Resident Indians), OCIs (Overseas Citizens of India) and RIs (Resident Indians) as well.
  4. Eligibility criteria: FPIs eligible for trading in the Indian markets have some eligibility criteria. The investor should not be a resident of India. Investors can include individuals, trusts, family offices, corporates etc. The investor should be eligible to invest in his/ her home country as well as outside the home country.
  5. Historical record: The FPI should also have a track record of sound financial health and a generally good reputation. He/ she must be professionally competent and have sound knowledge of making investments in offshore markets.
  6. Securities for investment: Foreign portfolio investors are permitted to invest in domestic equities, IPOs (initial public offering), derivatives, bonds, mutual funds and ETFs (exchange-traded funds). They must fulfil the eligibility criteria prescribed by regulators to invest in these asset classes.
  7. Commodity Futures: The market regulator in India SEBI (Securities and Exchange Board of India), has recently permitted FPIs to invest in commodity futures contracts in India. Only those investors with exposure in the physical commodities are permitted to invest in the futures markets. Additionally, the investor should have a net worth of at least USD 5,00,000 to trade in commodity futures.
  8. Monitoring: FPI investments are monitored and controlled by market regulators such as RBI, SEBI, the stock exchanges (NSE and BSE) and depositories (NSDL and CDSL). Foreign funding is monitored to assess the economic state and impact of fiscal and monetary policies on the markets and on investor sentiment both in India and abroad. The depositories are required to maintain records on the FPIs in India.

With the incentives for investment and ample high earning opportunities, there has been a steady growth in foreign investments in India. Market regulatory bodies and Government agencies also have a more structured approach to regulate and monitor foreign inflows and outflows, as compared to older times.

Investments have been revolutionized with the dematerialisation of securities and electronic transfers. Trading has become more lucid, convenient and quick. Foreign investors are more attracted than ever to the Indian markets as it is one of the fastest growing economies in the world, with adequate scope for investments. Government schemes and private participation in the industrial sector attract foreign investments in both FDI and FPI modes.

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