Banks from non-BIS countries now eligible for an FPI licence
Indian regulators have been wary of indirect investment routes.
In its operating guidelines released on Tuesday, the regulator has allowed banks from countries whose central bank is not a member of the Bank for International Settlements (BIS) to get a foreign portfolio investor (FPI) licence.
The development makes several Middle East-based banks including Qatar National Bank, Doha Bank and other banks based out of countries such as Bahrain eligible for trading in India.
The regulator has also allowed global private banks and regulated brokerages to invest in India on behalf of their clients. Market participants say both the developments would augur well to attract wider pool of capital into Indian markets.
Until now, only the banks from countries whose central bank is a part of BIS were eligible for an FPI licence. The BIS is promoted by central banks around the world and works as counterparty to several global transactions. Currently 60 central banks including the Reserve Bank of India (RBI) are part of the BIS system.
However, banks coming from non-BIS jurisdictions will be eligible for only a Category II licence, as per Sebi’s operating guidelines.
FPIs are classified into two categories based on their risk profile. Category I FPIs are the sovereign and publicly pooled funds who are subject to lenient know your customer (KYC) norms. Category II FPIs, on the other hand, are perceived as risker funds and are subject to higher documentation requirements.
“We welcome the clarification that banks can come in as Cat II FPIs although the central bank of the home jurisdiction is not a member of BIS,” said Sriram Krishnan, head of securities services at Deutsche Bank. “In the past we know that several banks from non-BIS countries were keen to set up as FPIs. So this can potentially lead to an uptick in registrations.”
An FPI consultant who remained anonymous said request for FPI licence of at least three Middle Eastbased banks was rejected in the past as their central bank wasn’t part of the BIS and after the new rules they will be eligible for a licence.
In another key announcement, the regulator also allowed foreign brokerages and banks to invest on behalf of their clients. In other words, an off-shore investor wanting to trade in Indian markets without registering as an FPI can come through this route.
The announcement assumes significance since Indian regulators have been wary of indirect investment routes. Infact, in the last five years, Sebi has cracked down on participatory notes (p-notes) which provided an indirect route for non-resident investors.
“Allowing foreign individuals and family offices to invest through private banks and other regulated FPIs will encourage first time investors who do not wish to register in India, to start investing in India,” said Rajesh Gandhi, partner, Deloitte India. “Sebi has removed a key barrier by allowing such FPIs to invest client money without the need to pool their funds.”