The Securities and Exchange Board of India (“SEBI”) has pursuant to considering interim recommendations of the SEBI Working Group under the chairmanship of Shri H R Khan, issued a circular dated December 13, 2018 (“Circular”) in relation to the clubbing of investment limits of FPIs. Regulation 21 (7) of the SEBI (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”) provides that purchase of equity shares of each company by a single foreign portfolio investor (“FPI”) or an investor group should be below 10% of the total issued capital of the company. In this regard, SEBI had previously, in its circular dated January 8, 2014, provided that where multiple FPIs belong to the same investor group, the investment limits of all such FPIs shall be clubbed at the investment limit as applicable to a single FPI. Under the said Circular SEBI has further clarified that clubbing of investment limit for FPIs will be on the basis of common ownership of more than 50% or based on common control. SEBI has also clarified that in case, two or more FPIs including foreign Governments/ their related entities have direct or indirect common ownership of more than 50% or control, all such FPIs will be treated as forming part of an investor group and the investment limits of all such entities will be clubbed at the investment limit as applicable to a single FPI. The only exemption prescribed to this clubbing rule is in cases whereof (a) the FPIs are appropriately regulated public retail funds; or (b) FPIs which are public retail funds majority owned by appropriately regulated public retail funds on a look through basis; or where (c) FPIs which are public retail funds and investment managers of such FPIs are appropriately regulated. The above exemption would be available only if the stated FPIs have common control and do not have more than 50% common ownership. In this regard, the term ‘control’ has now been defined under the FPI Regulations to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner. Right to control management decisions would also include right to control investment management decisions of the FPI. Hence, if FPIs have a common entity/person which takes investment decisions for such FPIs, then such FPIs would be considered to be a part of the same investor group.

Moreover, where the Government of India has entered into agreements or treaties with other sovereign Governments, recognizing certain entities to be distinct and separate, SEBI may, during the validity of such agreements or treaties also recognize them as such, subject to any conditions as may be specified in such agreements or treaties.

As per the Circular, FPIs in breach of the said investment limit can either (a) divest its holding within 5 (five) trading days from the date of settlement of the trades to bring its shareholding below 10% of the paid up capital of the company; or (b) the FPI investments will be treated as a Foreign Direct Investment (“FDI”) from the date of such breach. To conclude, FPIs should re-assess their ‘investor group’ in accordance with the above criteria and inform the designated depository participants if there is any change in ‘investor group’ details for the FPI, and/or whether the ‘investor group’ FPIs have breached the said investment limits. In this regard please note that SEBI may provide further guidance or clarity on the process to be followed by FPIs who have breached the investment limit and wish to re-classify their investment as a FDI. Also, further guidance is awaited on how this reclassification would be treated including how reclassified FDI holdings would be held in the securities accounts in India, requirements relating to disposal of such holdings, reporting and compliance requirements etc., if any.

Authors:

Rushabh Maniar, Partner
Nayanika Ruia, Associate