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A study on Qualified Foreign Investments (QFI): the system and its benefits to Foreign Nationals

Key Words
DP Depository Participant KYC Know you customer QFI Qualified Foreign Investor SEBI Securities & Exchange Board of India PML Prevention of Money Laundering MF Mutual Funds

Executive Summary
The Central Government, vide press release dated January 1, 2012 has announced its decision to allow QFIs to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, reduce market volatility and to deepen the Indian capital market. In order to facilitate the above and in consultation with the Government and RBI, it has been decided that foreign investors (termed as Qualified Foreign Investors/ QFI) who meet prescribed Know Your Customer (KYC) requirements may invest in equity shares listed on the recognized stock exchanges and in equity shares offered to public in India. In order to enable this they will hold equity shares in a demat account opened with a SEBI registered qualified Depository Participant. All DPs who have obtained approval of SEBI for undertaking activities relating to accepting investments by QFI in Mutual Fund schemes need not obtain separate approval from SEBI for commencing the activities relating to investments by QFI in equity shares. QFIs shall include individuals, groups or associations, Resident in a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and resident in a country that is a signatory to IOSCOs MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with Securities and Exchange Board of India (SEBI). QFIs do not include FIIs/Sub accounts/ Foreign Venture Capital Investor

Table of Contents
Contents
Introduction .................................................................................................................................................. 5 Permissible transactions allowed for QFIs investing into Indian securities ................................................. 8 Process flow ................................................................................................................................................ 11 Subscription ............................................................................................................................................ 11 Redemption ............................................................................................................................................ 11 Dividend .................................................................................................................................................. 12 Analytical Interpretation ............................................................................................................................. 13 Conclusions ................................................................................................................................................. 13

Introduction
QFIs shall include individuals, groups or associations, Resident in a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and resident in a country that is a signatory to IOSCOs MMOU (Appendix A Signatories) or a signatory of a bilateral MOU with Securities and Exchange Board of India (SEBI). QFIs do not include FIIs/Sub accounts/ Foreign Venture Capital Investor

QFI investment in debt mutual fund schemes which invest in infrastructure


1. QFIs have been allowed to invest in mutual fund debt schemes which invest in infrastructure debt up to a total ceiling of USD 3 billion out of the total long term corporate infrastructure limits of USD 25 billion. 2. Government has relaxed investment restriction for QFI investment in debt mutual fund schemes which invest in infrastructure. 3. QFIs can now invest in those debt mutual fund schemes that hold at least 25 percent of their assets (either in debt or equity or both) in the infrastructure sector under the USD 3 billion investment limit of debt mutual fund schemes which invest in infrastructure. 4. Monitoring and allocation of USD 3 billion limit of QFI investment in debt mutual fund schemes which invest in infrastructure shall be in the following manner(1) QFI can invest without obtaining approval until the overall QFI investments reaches 90% (ninety percent) of USD 3 billion i.e. USD 2.7 billion. 5. QFIs shall have to comply with provisions of the Foreign Exchange Management Act, 1999 (FEMA).

The total shareholding by a QFI cannot exceed five percent of the paid up equity capital of any company at any point of time. This limit shall be applicable to each class of equity shares having separate and distinct ISIN. Further, the aggregate shareholding of all QFIs shall not exceed ten percent of the paid up equity capital of the company at any point of time, in respect of each equity share class having separate and distinct ISIN.

Permissible transactions allowed for QFIs investing into Indian securities


1. Purchase/subscription of mutual fund units through Demat Account mode (Direct Route) and Unit Confirmation Receipt (UCR) [Indirect Route]. 2. Purchase of equity shares in public issues, to be listed on recognized stock exchange(s). 3. Purchase of listed equity shares through SEBI registered stock brokers, on recognized stock exchanges in India. 4. Redemption of mutual fund units purchased/subscribed through direct and indirect route 5. Sale of equity shares which are held in their demat account through SEBI registered stock brokers. f. Subscription of equity shares against rights issues. 6. Receipt of bonus shares or receipt of shares on stock split/ consolidation. 7. Receipt of equity shares due to amalgamation, demerger or such other corporate actions, subject to the investment limits. 8. Receipt of dividends and interest payments. 9. Tender equity shares in open offer in accordance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. 10.Tender equity shares in open offer in accordance with SEBI (Delisting of Equity Shares) Regulations, 2009. 11.Tender equity shares in case of buy-back by listed companies in accordance with SEBI (Buyback of Securities) Regulations, 1998 12.Purchase and sale of corporate debt securities listed on recognized stock exchange(s)

13.Purchase of corporate debt securities through public issues, if the listing on recognized stock exchange(s) is committed to be done as per the extant provisions of the Companies Act, 1956 14.Sale of corporate debt securities by way of buyback or redemption by the issuer 15.Purchase and sale of units of debt schemes of Indian mutual funds

QFI has two different options for investing in MF units: 1. Demat mode Direct route 2. Unit Confirmation Receipt (UCR) Indirect route

Process flow Subscription


1. The QFIs shall place a purchase/ subscription order mentioning the name of the scheme/MF with its DP and remit foreign inward remittances through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category - I bank. 2. DP in turn shall forward the purchase order to the concerned MF and remits the money to the MFs scheme account on the same day as the receipt of funds from QFIs. In case of receipt of money after business hours, DP shall remit the funds to MF scheme account by next business day. 3. If for any reasons, the DP is not able to remit the money to the MF scheme account within the stipulated timeframe, the DP shall immediately return the money to the designated overseas bank account of the QFIs. 4. MF shall process the order and credit units into the demat account of the QFIs. 5. If for any reasons the units are not allotted, MF / DP shall ensure that the money is remitted back to the QFIs designated overseas bank account within 3 working days from the date of receipt of subscription of money in the single rupee pool bank account of the DP maintained with a designated AD category I bank.

Redemption
1. QFIs can redeem, either through Delivery Instruction (physical/ electronic) or any another mode prescribed by the Depositories. On receipt of instruction from QFIs, DP shall process the same and forward the redemption instructions to the MF. Upon receipt of instruction from DP, MF shall process the same and

shall credit the single rupee pool bank account of the DP with the redemption proceeds. 2. The DP can make fresh purchase of units of equity and debt schemes of MF (if so instructed by the QFIs) out of the redemption proceeds received provided that payment is made towards such purchase is made within two working days of receipt of money from MF in the pooled bank account. In case no purchase is made within said period, the money shall be remitted by the DPs to the designated bank overseas account of the QFIs within two working days from the date of receipt of money from the MF in the pooled bank account.

Dividend
3. In case of dividend payout, the MF shall credit the single rupee pool bank account of the DP with the dividend amount. The DP in turn shall remit the same to the designated bank overseas account of the QFIs within two working days from the date of receipt of money from the MF in the DPs rupee pooled bank accountuser.

Analytical Interpretation
1. Income distributed on units is exempt in the hands of the unit holders as the MF is liable to pay income distribution tax (similar to dividend distribution tax 2. The benefits under the respective double taxation avoidance agreements should be applicable on the capital gains where the foreign investor is a tax resident of the respective countries.

Conclusions
1. The scheme will widen the class of investors, attract more foreign funds, reduce market volatility and will help in increasing the depth of the Indian capital market 2. An NRI cannot make investments simultaneously through the QFI route and portfolio investment scheme (PIS) route. However, a NRI can open demat account as QFI and make investments through this route provided he has closed all his demat account(s) opened as an NRI. 3. The same person/ entity can make investment through FDI and QFI route. However, where a person invests in a company through both FDI and QFI route, the aggregate holding of such person in the company shall not exceed five percent of paid up equity capital of the company at any point of time. This limit shall be applicable to each class of equity shares having separate and distinct International Securities Identification Number (ISIN). This shall be

subject to guidelines on FDI as prescribed by Government of India (GoI) and Reserve Bank of India (RBI) from time to time. 4. Except for FDI, the same set of ultimate beneficial owners(s), who intend to make investments through the QFI route, shall not directly or indirectly channelize investments simultaneously into Indian equities using any other available route such as NRI, FII, Sub Account or FVCI.