In a move to attract foreign investments through Foreign Portfolio Investors (FPI) framework rather than participatory notes (P-notes) route, the Securities and Exchange Board of India (SEBI) has tightened the rules for issue of P-notes, which are currently used by foreign investors to invest in the Indian markets without registering with SEBI.
Bearing in mind that Indian regulators including SEBI do not have direct jurisdiction over foreign instruments such as P-notes, the market regulator is making foreign investors to invest directly into India by registering as FPIs. Although, SEBI had earlier barred Category-III FPIs from issuing P-notes, it has now barred certain unregulated entities under Category-II from issuing P-notes. So far, unregulated entities could issue P-notes if their investment manager was regulated. However, SEBI has allowed only regulated entities to issue/subscribe to P-notes, ensuring that such entities can be easily reached through foreign regulators. Until November 2013, the notional value of P-notes on equity, debt and derivatives stood at Rs 1.82 lakh crore, or 13 percent of assets under custody of foreign institutional investors.
SEBI has divided FPIs into three categories based on their risk profile. The Category I FPIs include lowest risk entities such as foreign governments and government related foreign investors. Category II FPIs include appropriately regulated broad based funds and regulated entities, university related endowments and pension funds etc. Meanwhile, Category III FPIs include all others not eligible under the first two categories.
Bearing in mind that Indian regulators including SEBI do not have direct jurisdiction over foreign instruments such as P-notes, the market regulator is making foreign investors to invest directly into India by registering as FPIs. Although, SEBI had earlier barred Category-III FPIs from issuing P-notes, it has now barred certain unregulated entities under Category-II from issuing P-notes. So far, unregulated entities could issue P-notes if their investment manager was regulated. However, SEBI has allowed only regulated entities to issue/subscribe to P-notes, ensuring that such entities can be easily reached through foreign regulators. Until November 2013, the notional value of P-notes on equity, debt and derivatives stood at Rs 1.82 lakh crore, or 13 percent of assets under custody of foreign institutional investors.
SEBI has divided FPIs into three categories based on their risk profile. The Category I FPIs include lowest risk entities such as foreign governments and government related foreign investors. Category II FPIs include appropriately regulated broad based funds and regulated entities, university related endowments and pension funds etc. Meanwhile, Category III FPIs include all others not eligible under the first two categories.
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