India plans to liberalise rules for FPIs

The Indian government has announced plans to liberalise rules for foreign portfolio investors (FPIs) to attract more investments into the country's economy. The proposed regime includes a reduction in the time required for FPIs to register, the introduction of a single-window clearance system, and allowing foreign banks to trade on behalf of their clients without having to register with the Securities and Exchange Board of India (SEBI), according to the Mint newspaper.

This policy shift comes after the union budget for 2018-19, which was criticised for not being foreign investor-friendly, with its proposals to tax long-term capital gains in addition to the existing short-term capital gains and securities transaction taxes. 

The proposals seek to drastically cut the time to register for FPIs from two months at present to three to six days. Currently, foreign investors have to register with multiple regulatory bodies, including the SEBI, the Reserve Bank of India and the Central Board of Direct Taxes (CBDT). A single-window clearance that does away with the requirement for separate approvals from these bodies will assist this move. The drawn-out registration process has long been a barrier for potential foreign investors, which stems from them having to obtain a permanent account number and a Foreign Account Tax Compliance Act certificate, among other requirements. 

The single-window clearance plan had been mooted in a previous union budget for 2016-17. However, this ran into difficulties due to reported differences between the SEBI and CBDT. The former sought to reduce the paperwork while the latter preferred to insist on an incorporation and Foreign Account Tax Compliance Act (Fatca) documents. A common ground has been now found with only a six-page form required, while Fatca and other requirements will be done by brokers and custodians, according to the Mint. This will considerably improve the ease of access of FPIs into India’s stock markets. 

Lastly, allowing foreign private banks to trade on behalf of their clients without FPI registration is also a key reform. This will improve the operational flexibility of FPIs as the SEBI earlier tightened norms on the issue of derivatives, such as participatory notes without registration. FPIs thus can trade in Indian stocks without separately registering with the SEBI. The private banks, for their part, will have to keep a tab on the funds to ensure that these are not being misused for treaty shopping. While these changes would lower barriers for foreign investors, the big question is whether they are enough to offset the uncertainties arising from the new tax regime.