Investment by Foreign Qualified Investor in Listed Equity Shares

Introduction:

In 2012, the Indian Government allowed investments by Foreign Nationals in the

Indian Equity and Debt Markets.Previously this was allowed only for certain
registered Corporate Entities and Indian Nationals residing overseas. Now Individuals
in over 40 countries can invest into Indian Equity and Debt Markets in their individual
capacities, and also set up corporations to invest on their behalf.The Rules and
regulations governing such investments have been notified and such investments have
already started.In the countries such as India, where financial markets are not fully
liberalized, an investor authorised / recognized by the local financial regulator such as
SEBI or RBI in India, to participate in certain types of transaction as long as specific
criteria are met are called Qualified Foreign Investors (QFIs). The investment by QFIs
or any other entity in a country depends upon Local regulations and Investment
schemes or markets involved.Qualified Foreign Investor is different from that of
Foreign Portfolio Investors and NRIs.A QFI can, for instance, be a foreign individual
investor in Singapore or Russia, who can buy into stocks of a Tata group company or
Coal India or any other listed stock after fulfilling the Know Your Customer norms
through an Indian depository participant and obtaining the approval of the RBI. QFIs
can buy up to 5% of the paid-up capital of a company, with the overall limit capped at
10% in a company. And these investment limits are separate or over and above that for
Foreign Individual Investors and NRIs.
QFIs are defined by the Government to include individuals, groups or associations,
resident in a foreign country:

(a) that is compliant with the recommendations of the Financial Action Task Force
(FATF)

(b) the securities commission or financial regulator of which is a signatory to International

Organization of Securities Commissions (IOSCO) Multilateral Memorandum of
Understanding.
Union Budget has announced such a QFI scheme and Government of India introduced
this in consultation with RBI and SEBI in the year 2011.

The main purpose of enabling QFIs is to deepen and infuse more foreign funds in the
Indian capital market and to reduce market volatility as individuals are generally
assumed to be long-term investors, as compared to institutional investors in the
market. Thus to open the way for foreign funds in Indian markets and further invest
them to earn the profit from such investments.

QFIs are permitted to make investments in specified/selected instruments by opening

a demat account in any one of the SEBI approved Qualified Depository Participant
(QDP).

What are the Permissible Investment Activities for QFIs?

 Purchase of equity shares in public issues, to be listed on a recognised stock

exchange(s) of India.
 Purchase and sale of listed equity shares on recognized stock exchanges in
India.
 Redemption of mutual fund units purchased/subscribed through the direct and
indirect way
 Subscribing to the equity shares against rights issues.
 Receiving bonus shares or receipt of shares on stock split/ consolidation in the
market.
 Receiving equity shares offered due to amalgamation, demerger or such other
corporate actions, subject to the investment limits.
 Receiving dividends and interest payments on its investments.
 Submit its equity shares in an open offer as per provisions of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
 Submit its equity shares in an open offer as per the provisions of SEBI
(Delisting of Equity Shares) Regulations, 2009.
 Offer its equity shares in case of buy-back by listed companies as per the
provisions of SEBI (Buyback of Securities) Regulations, 1998
 Purchase and sale of corporate debt securities as listed on a recognized stock
exchange(s) of India;
 Purchase of corporate debt securities through public issues, if a listing on the
recognized stock exchange(s) is committed to being done as per the extant
provisions of the Companies Act, 1956;
 Sale of corporate debt securities by way of buyback or redemption by the
issuer held by it.
 Purchase and sale of units of debt schemes of Indian mutual funds as held by
it.

However, there are certain key Investment Restrictions and further limits in the case
of investments made by QFIs.
Restrictions on Investments:

 QFIs can transact in Indian equity shares only on delivery basis.

 QFIs are not allowed to issue offshore derivative instruments/ participatory
notes against shares in India
 QFIs are permitted to open a single non-interest bearing bank account with an
Authorised Dealer (AD) Category – 1 bank & only one demat account with
any one of the QDPs. It shall make purchase and sale of equity shares through
this QDP only.

Limits on Investments:

 The total shareholding by an individual QFI shall not be more than five
percent of a company’s paid-up equity share capital at any time, in respect of
each class of equity shares of the company.
 The aggregate shareholding of all QFIs shall not be more than ten percent of a
company’s paid-up equity share capital at any time, in respect of each class of
equity shares of the company.

Guidelines:

The RBI has granted general permission to QFIs for acquisition of equity shares in India
by purchasing (i) equity shares of listed Indian companies through recognized brokers on
recognized stock exchanges in India, and (ii) equity shares of Indian companies which are
offered to the public in India generally. Consequently, QFIs can acquire listed equity
shares through participation in rights issues or by way of bonus issues, stock
splits/consolidation, amalgamation, demerger or similar corporate actions. QFIs are
permitted to divest their shares either through trades on stock exchanges in India,
participation in open offers (in both takeovers and delisting situations) and buy backs.  

In order to invest, QFIs are required to open a dematerialisation account with a Depository
Participant ("DP") registered with the Securities and Exchange Board of India ("SEBI").
Sale and purchase of equity by QFIs are allowed only through such an account. Each QFI
can open only one dematerialization account irrespective of whether or not it is a joint
account. In addition to this, each QFI is allowed to transact trades in equity through only
one designated overseas bank account based in a country that satisfies the FATF and
IOSCO requirements mentioned above.
The individual and aggregate investment ceilings for QFIs are 5% and 10% respectively of
each class of equity shares of the paid up capital of the Indian company. These ceilings are
separate from and in addition to those specified for investments in Indian equity by FIIs
and NRIs.The Circular also specifies that depositories have to report to the RBI, the
aggregate percentage of shares held by QFIs with respect to each class of equity shares in
Indian companies. Where the aggregate percentage for a class of equity shares in a
company exceeds 8% of the total equity shares of that class, the depository is required to
put that class of equity shares on a caution list. This caution list is then to be
communicated to all DPs and recognized stock exchanges. If the aggregate holding of
QFIs falls below 8%, the relevant class of equity shares is to be removed from the caution
list.

To hold any equity shares in the caution list, QFIs have to take prior approval from the
relevant depository (through its DP). Where any trade by a QFI causes the aggregate
holding of QFIs in a class of equity shares of a company to exceed 10%, the QFI is
required to divest her/his/it’s holding (to the extent it exceeds the 10% limit) within three
days of being informed by the depository that the trade has caused the aggregate holdings
of QFIs to exceed the 10% limit.

Conclusion:

QFIs, have now been merged in to Foreign Portfolio Investors, when the FPI
regulations were introduced in 2014.The introduction of the proposed QFI route
would forecast well for the Government to stimulate investment activity.While the
issuance of Press Release is a proactive step by the Government to address the
changing need of the times, only upon release of the fine print of the regulatory
framework governing QFIs, one would be able to determine whether the QFI route
would provide greater attraction to foreign investors as compared to the extant
investment regimes.QFIs access to equity market is expected to broad base the market
while enhancing the capital flows into India. More importantly, since QFIs are the
diversified set of heterogeneous investors, QFIs participation is expected to help
dampen the volatility in Indian equity market that arises due to sudden inflows or off-
loading done by FIIs. The direct participation route offered through the QFI scheme
was expected to reduce the transaction cost and complexity hitherto persisting due to
large number of intermediaries. It would also bring in better transparency while
reducing the need for using participatory notes route. QFIs access to Equity market is
also expected to help harnessing the investment potential remaining untapped in
various sectors.