QFI Investment in India

QFIs stands for Qualified Foreign Investors. They are a new category of non-resident investors. QFIs are presently allowed to invest in Indian Equity, Debt Securities and Mutual Funds.

Who are QFIs?

Mr. Pankaj Singla
Sr. Associate
+919971508320
pankaj@indiacp.com

QFIs include foreign nationals, pension funds, insurance funds, companies or other groups, entities, or associations other than Securities Exchange Board of India (SEBI) registered foreign institutional investors (FIIs) and foreign venture capital investors (FVCIs) that are based out of India and are permitted to invest directly in selected securities of Indian companies by the government.

The QFI is also required to be resident of a country member of Financial Action Task Force (FATF) or a member of a group member to FATF. Additionally, the country of residence
of the QFI must also be a signatory to International Organization of Securities Commissions’ (IOSCO) Multilateral Memorandum of Understanding (MMOU).

Securities and Exchange Board of India (SEBI) defines QFIs as:

QFI shall mean a person who fulfils the following criteria:

• Resident in a country that is a member of Financial Action Task Force (FATF) or a member of a group which is a member of FATF; and

• Resident in a country that is a signatory to IOSCO’s MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with SEBI:

Provided that the person is not resident in a country listed in the public statements issued by FATF from time to time on-

• jurisdictions having a strategic Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) deficiencies to which counter measures apply,

• jurisdictions that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies:

Provided further such person is not resident in India.

Provided further such person is not registered with SEBI as Foreign Institutional Investor or Sub-account or Foreign Venture Capital Investor.

Explanation: For the purposes of this clause

1. The term "Person" shall carry the same meaning under section 2(31) of the Income Tax Act, 1961; 
2. The phrase “resident in India” shall carry the same meaning as in the Income Tax Act, 1961; 
3. “Resident" in a country, other than India, shall mean resident as per the direct tax laws of that  country. 
4. “Bilateral MoU with SEBI” shall mean a bilateral MoU between SEBI and the overseas regulator that inter alia provides for information sharing arrangements. 
5. Member of FATF shall not mean an Associate member of FATF.

Simply put, QFIs may be defined as:

• A person resident in a country that is a member of and compliant with Financial Action Task Force (FATF) or a member of a group which is a member of FAT and is a signatory to IOSCO’s MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with SEBI.

• QFI should not be a person resident in India.

• QFI should not be registered with SEBI as Foreign Institutional Investor (FII) or Sub-Account or Foreign Venture Capital Investor.

The QFIs in compliance with the Know Your Customer (KYC) requirements of SEBI are allowed to invest in Rupee denominated (i) Units of Domestic Mutual Funds, (ii) Listed Equity Shares, (iii) Indian Corporate Debt Securities and Debt Schemes of Indian Mutual Funds.

Mutual Funds

The Indian market was first opened to QFIs in August 2011 with the decision to allow QFIs to purchase, on repatriation basis, Rupee denominated units of equity schemes of domestic Mutual Funds. The QFIs are allowed to purchase only the funds issued by domestic Mutual Funds in accordance with the terms and conditions as stipulated by the SEBI and the RBI from time to time.

There are two routes by which investment can be made by QFIs, namely:

1. Direct Route – SEBI registered Qualified Depository Participant (QDP) route 
2. Indirect Route - Unit Confirmation Receipt (UCR) route

Caps on Investment:

1. Investment by QFIs in the equity schemes of domestic Mutual Funds has been capped at an overall ceiling of $10 billion.
2. The Mutual Funds (MFs) would stop accepting fresh investment from QFIs whenever the total investment reaches US $ 8 billion in equity schemes of domestic MFs. 
3. SEBI would allot the remaining limit of US $ 2 billion in equity schemes through auction.

Other Regulations on the Investment:

1. QFIs are allowed to invest only in the units directly issued by the domestic MFs. Any kind of secondary market purchases are prohibited.
2. Systematic Investments/ transfer/ withdrawals and switches are not available to the QFIs
3. QFIs are only allowed to subscribe or redeem.
4. Units held by QFIs are non-transferable and non-tradable.
5. Units/ UCRs held by QFIs must remain free from all encumbrances i.e. creation of pledge or lien for such units is prohibited.

Investing under Direct Route (Demat Account)

Parties Involved:- Only three parties are involved i.e., QFIs, Qualified Depository Participant (QDP) and MFs.

Qualification Requirement for a Qualified Depository Participant (QDP)

A SEBI registered DP must satisfy the following to become a QDP:

1. Minimum paid up capital of Rs.50 Crore or more.
2. DP shall be either a clearing bank or clearing member of any of the clearing corporations.
3. DP shall have appropriate arrangements for receipt and remittance of money with a designated Authorized Dealer (AD) Category - I bank.
4. DP shall demonstrate that it has systems and procedures to comply with the FATF Standards, Prevention of Money Laundering Act, 2002 (PMLA) and SEBI circulars issued from time to time.
5. DP shall obtain prior approval of SEBI before commencing the activities relating to accepting MF subscription from QFIs.

Subscription Process

1. A purchase/ subscription order mentioning the details of the MF can be placed by the QFI with its QDP.
2. QFI can remit foreign inward remittance through normal banking channel in any permitted currency (freely convertible) directly to the single non-interest bearing rupee bank account maintained with a designated AD Category - I bank.
3. The single non-interest bearing Rupee Account with an AD Category- I bank in India should be used for the purpose of routing the funds for the payment of transactions relating to purchase of units of MF.
4. QDP shall forward the purchase order to the concerned MF and remit the money to the MF’s scheme account.

Redemption Process

1. QFI can redeem, either through Delivery Instruction (physical/ electronic) or any another mode prescribed by the Depositories.
2. On receipt of instruction from QFI, QDP shall process the same and forward the redemption instructions to the MF.
3. The QDP can make fresh purchase of units of equity schemes of MF, if so instructed by the QFI, out of the redemption proceeds received.

Investing under Indirect Route [Unit Confirmation Receipts (UCR)]

Parties Involved:- There shall be four parties involved - QFIs, UCR issuer (based overseas), SEBI registered Custodian (based in India) and MF.

UCR issuer:

• QFIs can subscribe / redeem only through the UCR Issuer.
• MF shall appoint one or more UCR issuing agents overseas and one SEBI registered Custodian in India.
• UCR issuer appointed by MF shall act as an agent of the MF.

MF can appoint entities fulfilling the following conditions as UCR:

1. The entity is able to demonstrate that it has proven track record, expertise and technology in the business of issuance of global depository receipts/ global custody agency.
2. The entity is registered with an overseas securities market/banking regulator.

Subscription Process

1. The QFI places a purchase/ subscription order through the UCR issuer.
2. UCR issuer shall forward the order of QFI to the MF/Custodian.
3. Upon receipt of funds; the MF shall issue units to the Custodian and the Custodian in turn confirms to the UCR Issuer to issue UCR to the QFI.

Redemption Process

1. UCR issuer shall confirm receipt of redemption request to the MF and Custodian.
2. MF shall process the same and shall transfer the redemption proceeds to the MF overseas bank account or to the UCR issuer for making payment to the designated bank account of the QFI. 

QFI Investment in Equity Shares

After liberalizing the Mutual Funds market for QFIs, the Government of India on 01 January, 2012 confirmed its decision to allow QFIs to invest in equity shares of Indian companies listed on Stock Markets in India. The move is said to be motivated by the desire to widen the non-resident investor base in the Indian stock markets and bring stability in the stock markets through relative long-term and stable investments of QFIs.

On 13 January, Reserve Bank of India issued the detailed guidelines to enable QFIs to invest directly into Indian equity market.

Eligible QFIs may purchase/acquire/receive:

1. listed equity shares,
2. equity shares in public issues,
3. by way of rights issues,
4. bonus shares,
5. on account of stock split / consolidation , and
6. on account of amalgamation, demerger or other corporate actions.

QFIs shall also be allowed to sell such equity shares:

• on listed stock exchanges,
• through open offer, and
• through buyback schemes.

Cap on Investment and other restrictions:

1. An individual QFI can buy up to 5% of the paid-up capital of a company, in respect of each class of equity shares.
2. The overall (aggregate) limit for QFI investment has been set at 10% of the paid-up capital of the company, in respect of each class of equity shares.
3. The investment limits are over and above the investment ceilings for FIIs and NRIs.
4. The QFI investment is subject to overall sectoral FDI limits, wherever applicable.

Purchase Process

1. A purchase order mentioning the details of the company, equity share class and quantity can be placed by the QFI with its QDP.
2. QFI can remit foreign inward remittances through normal banking channel in any permitted currency (freely convertible) directly to the single non-interest bearing rupee bank account maintained with a designated AD category - I bank.
3. The single non-interest bearing Rupee Account with an AD Category- I bank in India should be used for the purpose of routing the funds for the payment of transactions relating to purchase of equity shares.
4. QDP shall forward the purchase order and remit money to the concerned SEBI registered stock broker.
5. QDP shall also be responsible for ensuring the credit of equity shares in QFI’s Demat account.

Sale Process

1. QFI can sell its equity shares by instructing the QDP by mentioning the details of the company, equity share class and quantity of equity shares to be sold.
2. On receipt of instruction from QFI, QDP shall process the same and forward the sale instructions to the SEBI registered stock broker.
3. The sale proceeds are transferred to QFI’s single non-interest bearing Rupee Account.
4. The QDP can make fresh purchase of equity shares, if so instructed by the QFI, out of the sale proceeds received.

Repatriation Process

1. The sale proceeds of equity shares are received in non-interest bearing individual Rupee bank accounts maintained with AD bank in India.
2. The sale proceeds can be freely repatriated to the designated overseas bank account of the QFI, subject to the payment of applicable taxes.
3. A QFI is now not required to repatriate the funds lying in its non-interest bearing Rupee Account within any stipulated time.

Indian Corporate Debt Securities

QFIs are now eligible to purchase on repatriation basis Indian corporate debt securities and debt schemes of Indian mutual funds directly from the issuer or through a registered stock broker on a recognized stock exchange in India.

Consequently, the QFIs can transact in the following debt securities:

1. Sale and purchase of Corporate Debt Securities that are listed on stock exchange(s) in India;
2. Purchase of Corporate Debt Securities through public issues on stock exchange(s);
3. Sale of Corporate Debt Securities by way of buyback or redemption by the issuer;
4. Sale and purchase of units of Debt Schemes of Indian Mutual Funds.

Caps and limits on investment:

1. A separate sub-limit of USD 1 billion has been created to encourage QFIs to invest in corporate debt securities (without any lock-in or residual maturity clause) and Mutual Fund Debt schemes;
2. The limit shall be over and above USD 20 billion for FII investment in corporate debt.
3. Investment in Corporate Debt Securities and Mutual Fund Debt schemes can be made by QFIs without obtaining prior approval, until the aggregate QFI investments reached 90 per cent of $1 billion, i.e., $900 million.
4. Fresh purchases beyond the initial limit of 90% can only be made by obtaining prior approval of the depositories. The QFI shall make such request for prior approval to the concerned depository through the QDP.

Debt Mutual Fund schemes with assets in Infrastructure Sector

Additionally, QFIs have been allowed to invest in Debt Mutual Fund schemes that hold at least 25 percent of their assets (either in debt or equity or both) in the infrastructure sector. The QFIs can invest up to USD 3 billion in debt mutual funds investing in infrastructure sector as per the scheme.

Moreover, QFIs can invest without obtaining approval until the overall QFI investments reaches 90% (ninety percent) of USD 3 billion i.e. USD 2.7 billion.

Easing of other Regulatory Norms for the QFIs:

1. QFIs were previously required to transfer funds to their overseas bank accounts if such funds were not invested in two days of the receipt of funds in their accounts. This restriction concerning the number of days was later changed to five working days and has now been completely dispensed with.
2. QFIs are allowed to open non-interest bearing individual Rupee bank accounts with Authorized Dealer Banks in India. QFIs can receive funds and make payments towards the eligible investments from these Indian bank accounts.
3. QFIs may appoint Custodians on their behalf to route their investments. Such Custodians, once appointed, would be responsible for performing clearing and settlement of securities on behalf of the QFI client. However, such custodian must be a qualified QDP of the QFI and is required to be registered as custodian with SEBI under SEBI (Custodian of Securities) Regulations, 1996.