1

Role of SEBI in Foreign Investment: An Analysis

SUBMITTED TO
Mr. Ankit Awasthi
FACULTY MEMBER IN NRIT

SUBMITTED BY
ONINDYA MITRA
B.A. LL.B (HONOURS) STUDENT
SEMESTER IX, SECTION – B, ROLL NO: 194

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Uparwara Post, Abhanpur, New Raipur – 493661 (C.G.)

Date of submission: 23-10-18

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ACKNOWLEDGEMENTS

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty. This research venture has been made possible due to the generous co-
operation of various persons. To list them all is not practicable, even to repay them with words is
beyond the domain of my lexicon.

This project wouldn’t have been possible without the help of my teacher Mr. Ankit Awasthi,
Faculty Member, HNLU, Raipur, who had always been there at my side whenever I needed some
help regarding any information. He has been my mentor in the truest sense of the term. The
administration has also been kind enough to let me use their facilities for research work, I thank
them for this.

Onindya Mitra
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CONTENTS

Acknowledgements ................................................................................................................ 2
Chapter 1: Introduction .......................................................................................................... 4
Research Objective .................................................................................................................8
Methodology ...........................................................................................................................8
Mode of Citation .................................................................................................................... 8
Chapter 2: SEBI: An Introduction……………………….......................................................9
Chapter 3: SEBI Regulations.................................................................................................17
Conclusions .......................................................................................................................... 31
Bibliography/ References...................................................................................................... 32
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INTRODUCTION

India, with a young skilled workforce, high growth rate and deregulation being undertaken by the
government, is set to become an important destination for foreign investment. Foreign
investments in the country can take the form of investments in listed companies (i.e FII
investments); investments in listed/unlisted companies other than through stock exchanges (i.e
Foreign Direct Investment, Private Equity / Foreign Venture Capital Investment route);
investments through American Depository Receipts / Global Depository Receipts (ADR/GDR)
or investments by Non Resident Indians (NRIs) and Persons of Indian Origin (PIO) in various
forms in case of foreign indirect investment. Whereas, Foreign direct investments (FDIs) are the
physical investments and purchases made by a company in a foreign country, typically by
opening plants and buying buildings, machines, factories and other equipment in the foreign
country. These types of investments find a far greater deal of favor, as they are generally
considered long-term investments and help bolster the foreign country’s economy.

The boundaries of the project is constructed around the functioning of the market regulator SEBI
in terms of foreign investment. SEBI being the regulator of capital market can only look for the
indirect investments. There are a lot of foreign investors as banks, institutions and companies
which invests in India in different securities. SEBI acts as a watchdog for all the necessary
operations.
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RESEARCH OBJECTIVE
The objectives of this research project are as follows:

1) To study legislation regarding foreign investment in India,

2) To trace the major developments in foreign investment,

3) To analyze the functioning of the SEBI in foreign investment.

METHODOLOGY

The research project is the result of a descriptive non-empirical research work. Use of primary
sources such as study of statutes has been made and secondary sources such as articles from e-
journals, newspapers, blogs are taken for reference.

MODE OF CITATION

This research project has been made following the Bluebook Style of Citation (19th Ed.)
 6

SEBI-An Introduction

What is Foreign Investment?

Foreign investment is when a company or individual from one nation invests in assets or
ownership stakes of a company based in another nation. As increased globalization in business
has occurred, it's become very common for big companies to branch out and invest money in
companies located in other countries. These companies may be opening up new manufacturing
plants and attracted to cheaper labor, production, and fewer taxes in another country. They may
make a foreign investment in another firm outside of their country because the firm being
purchased has specific technology, products, or access to additional customers that the
purchasing firm wants. Overall, foreign investment in a country is a good sign that often leads to
growth of jobs and income. As more foreign investment comes into a country, it can lead to even
greater investments because others see the country as economically stable.

Types

Foreign investments can be split into direct and indirect investments. Direct investments are
when companies make physical investments and purchases in buildings, factories, machines, and
other equipment outside of their home country. Indirect investments are when companies or
financial institutions purchase positions or stakes in companies on a foreign stock exchange. This
type of investment isn't as favorable as direct investment because the home country can sell their
investment very easily, on the next day if they choose. Direct investments are usually a longer-
term investment in the economy of a foreign country. It's not nearly as easy to sell factories,
machines, and buildings as it is to sell shares of stock.

Foreign portfolio investment (FPI), on the other hand is a category of investment instruments
that is more easily traded, may be less permanent, and do not represent a controlling stake in an
enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign
enterprise which does not necessarily represent a long-term interest. This may include-
Stocks:

 dividend payments
 holder may own a part of the company
 possible voting rights
 open-ended holding period
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Bonds:
 interest payments
 ownership of bond rights only
 no voting rights
 specific holding period

While FDI tends to be commonly undertaken by multinational corporations, FPI comes from my
diverse sources such as a small company’s pension or through mutual funds held by individuals.

The returns that an investor acquires on FPI usually take the form of interest payments or
dividends.

Investments in FPI that are made for less than one year are distinguished as short-term portfolio
flows. FPI flows tend to be more difficult to calculate definitively, because they comprise so
many different instruments, and also because reporting is often poor. Estimates on FPI totals
generally vary from levels equaling half of FDI totals, to roughly one-third more than FDI totals.

Other Types of Foreign Investment

There are two additional types of foreign investments to be considered: commercial loans and
official flows. Commercial loans are typically in the form of bank loans that are issued by a
domestic bank to businesses in foreign countries or the governments of those countries. Official
flows is a general term that refers to different forms of developmental assistance that developed
or developing nations are given by a domestic country.1

Commercial loans, up until the 1980s, were the largest source of foreign investment throughout
developing countries and emerging markets. Following this period, commercial loan investments
plateaued, and direct investments and portfolio investments increased significantly around the
globe.

How can an Indian company receive Foreign Investment?

The routes under which foreign investment can be made is as under:

Automatic Route: Foreign Investment is allowed under the automatic route without prior
approval of the Government or the Reserve Bank of India, in all activities/ sectors as specified 2

1
Foreign Direct and Indirect Investment in India, http://www.investopedia.com/terms/f/fii.asp, last seen 1/10/17
2
Annex B of Schedule 1 to Notification No. FEMA 20.
 8

Government Route: Foreign investment in activities not covered under the automatic route
requires prior approval of the Government which are considered by the Foreign Investment
Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can
be made in Form FC-IL, Plain paper applications carrying all relevant details are also accepted.
No fee is payable.

Instruments for receiving foreign investment in an Indian company

An Indian Company can receive foreign investment by issue of

 Equity shares issued in accordance with the provisions of the Companies Act, 2013;

 Fully and mandatorily convertible preference shares, and fully and mandatorily convertible
debentures. The price/ conversion formula of convertible instruments should be determined
upfront at the time of issue of the instruments and should not in any case be lower than the
fair value worked out, at the time of issuance of such instruments, in accordance with FEMA

 Partly paid equity shares and warrants issued by an Indian company in accordance with the
provision of the Companies Act, 2013 and the SEBI guidelines, as applicable, The pricing
and receipt of balance consideration shall be as stipulated 3 and as modified from time to time.

Concept of downstream investment and Indirect Foreign Investment

Downstream investment is investment by one Indian company in another Indian company. If the
investor company is not owned and not controlled by resident Indian citizens or owned or controlled
by person resident outside India then such investment shall be “Indirect Foreign Investment” for the
investee company.

Is a non-resident permitted to acquire shares on stock exchange?

The following persons can acquire FDI compliant instruments on the stock exchanges:

 FPIs and FIIs registered with SEBI

 NRIs

 A non-resident, other than portfolio investor, is eligible to acquire shares on stock exchange
through a registered broker subject to the condition that the non-resident

3
of A.P.(DIR Series) Circular No.3 dated July 14, 2014
 9

investor has already acquired and continues to hold the control in accordance with SEBI
(Substantial Acquisition of Shares and Takeover) Regulations i.e. he has complied with the
minimum stake requirement under SEBI Regulations as per instructions
 10

FOREIGN INSTITUTIONAL/PORTFOLIO
INVESTORS

Definition: Foreign institutional investors (FIIs) are those institutional investors which invest in
the assets belonging to a different country other than that where these organizations are based.4
SEBI’s definition of FII’s presently includes foreign pension funds, mutual funds, charitable
/endowment /university funds etc. as well as asset management companies and other money
managers operating on their behalf.5

Description: Foreign institutional investors play a very important role in any economy. These are
the big companies such as investment banks, mutual funds etc, who invest considerable amount
of money in the Indian markets. With the buying of securities by these big players, markets trend
to move upward and vice-versa. They exert strong influence on the total inflows coming into the
economy.

Market regulator SEBI had over 1450 foreign institutional investors registered with it. The FIIs
are considered as both a trigger and a catalyst for the market performance by encouraging
investment from all classes of investors which further leads to growth in financial market trends
under a self-organized system.

FII as a category does not exist now. It was decided to create a new investor class called
"Foreign Portfolio Investor" (FPI) by merging the existing three investor classes viz. FIIs, Sub
Accounts and Qualified Foreign Investors. Accordingly, SEBI (Foreign Portfolio Investors).
Regulations, 2014 were notified on January 07, 2014 followed by certain other enabling
notifications by Ministry of Finance and RBI. In order to ensure the seamless transition from FII
regime to FPI regime, it was decided to commence the FPI regime with effect from June 1, 2014
so that the requisites systems and procedures are in place before migration to the new FPI
regime.

With the new FPI regime, which has commenced from 1 June 2014, it has now been decided to
dispense with the mandatory requirement of direct registration with SEBI and a risk based
verification approach has been adopted to smoothen the entry of foreign investors into the Indian
securities market.

4
Foreign Institutional Investors, Economic Times, http://economictimes.indiatimes.com/topic/foreign-institutional-
investors, Last seen 1/10/17
5
Section 2(f) ,SEBI (Foreign Institutional Investors )Regulation Act.
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FPIs have been made equivalent to FIIs from the tax perspective, vide central government
notification dated 22nd January 2014.6

How do they invest?

A SEBI registered FII7 can invest/trade through a registered broker in the capital of Indian
Companies on recognised Indian Stock Exchanges. FIIs can purchase shares / convertible
debentures either through private placement or through offer for sale.

An FII can also invest in India on behalf of a sub-account (means any person outside India on
whose behalf investments are proposed to be made in India by a FII) which is registered as a sub-
account.8

Also, an FII can issue off-shore derivative instruments (ODIs) to persons who are regulated by
an appropriate foreign regulatory authority and after compliance with Know Your Client (KYC)
norms.

Every FII/sub-account is required to appoint a domestic Indian custodian to hold in custody its
Indian securities. Custodian of Securities is a registered and regulated entity by SEBI. The
FII/sub-account is also required to ensure that the domestic custodian it has appointed monitors
the investments made by it in India, reports its transactions in securities to SEBI on a daily basis
and preserve records of transactions for a specified period. The FII/sub-account is also required
to suitably enable the custodian to furnish reports pertaining to its activities, to SEBI, as and
when required by SEBI.9

Authorized dealer banks (i.e. the bank which is authorized by RBI to deal in foreign currency)
can offer forward cover (i.e, to minimize the impact of currency fluctuations, banks offer them
the option to sell / purchase foreign currency on a fixed future date at a rate specified today) to
FIIs to the extent of total inward remittances of liquidated investments.10

What FIIs can do?

A Foreign Institutional Investor may invest only in the following:-

6
Foreign Institutional Investors, http://www.arthapedia.in/index.php?title=Foreign_Institutional_Investor_(FII),
last seen 1/10/17.
7
as per Schedules 2 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations 2000
8
Section 2 (k) of the SEBI (FII) Regulations, 1995.
9
Foreign Institutional Investors,http://www.investopedia.com/terms/f/fii.asp, last seen 1/10/17
10
SEBI (Foreign Institutional Investors Regulation) Act
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 securities in the primary and secondary markets including shares, debentures and
warrants of companies listed or to be listed on a recognised stock exchange in India; and

 units of schemes floated by domestic mutual funds including Unit Trust of India,
whether listed on a recognized stock exchange or not

 units of scheme floated by a collective investment scheme

 dated Government Securities

 derivatives traded on a recognized stock exchange

 commercial papers of Indian companies

 Rupee denominated credit enhanced bonds

 Security receipts

 Indian Depository Receipt

 Listed and unlisted non-convertible debentures/bonds issued by an Indian company in the

infrastructure sector, where ‘infrastructure’ is defined in terms of the extant External
Commercial Borrowings (ECB) guidelines

 Non-convertible debentures or bonds issued by Non-Banking Financial Companies

categorized as ‘Infrastructure Finance Companies’(IFCs) by the Reserve Bank of India

 Rupee denominated bonds or units issued by infrastructure debt funds

 Indian depository receipts; and

 Such other instruments specified by the Board from time to time.

 FIIs are allowed to trade in all exchange traded derivative contracts subject to the position
limits as prescribed by SEBI from time to time. Clearing Corporation monitors the open
positions of the FII/ sub-accounts of the FII for each underlying security and index,
against the position limits, at the end of each trading day.

FII investment limits

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Investment by individual FIIs/ sub-accounts (excluding foreign corporates and individuals)

cannot exceed 10 per cent of paid up capital of a company. Investment by foreign corporates or
individuals registered as sub accounts of FII cannot exceed 5 per cent of paid up capital. All FIIs
and their sub-accounts taken together cannot acquire more than 24 per cent of the paid up capital
of an Indian Company. An Indian Company can raise the 24 per cent ceiling to the Sectoral Cap /
Statutory Ceiling, as applicable, by passing a resolution by its Board of Directors followed by
passing a Special Resolution to that effect by their General Body. The list of such companies
who have passed a Special Resolution.11
Foreign Portfolio Investment in India: SEBI creates a new class of investors

The Indian securities market regulator i.e. Securities Exchange Board of India (“SEBI”) has
introduced a new class of foreign investors in India known as the Foreign Portfolio Investors
(“FPIs”). This class has been formed by merging the existing classes of investors through which
portfolio investments were previously made in India namely, the Foreign Institutional Investors1
(“FIIs”), Qualified Foreign Investors12 (“QFIs”) and sub-accounts13 of the FIIs. Previously
portfolio investment was governed under different laws i.e. the SEBI (Foreign Institutional
Investors) Regulations, 1995 (“FII Regulations”) for FIIs and their subaccounts and SEBI
circulars dated August 09, 2011 and January 13, 2012 governing QFIs, which are now repealed
under the SEBI (Foreign Portfolio Investors) Regulations (“FPI Regulations”) that govern FPIs.
SEBI has, thus, intended to simplify the overall operation of making foreign portfolio
investments in India.
Classification based registration of investors

FPI has been defined under FPI Regulation 2(h) as a person meeting the eligibility criteria
specified under Regulation 4 (covered under (b) below) and duly registered under Chapter II and
are considered as intermediaries for the purposes of SEBI Act, 1992. Under FPI Regulation 5 the
following three categories of FPIs have been created on the basis of associated risks –

(a) Category I includes foreign investors related with the government such as central
banks, government agencies, sovereign wealth funds;

11
nvestment in Indian Companies by non-residents, https://www.rbi.org.in/scripts/BS_FiiUSer.aspx, last seen
1/10/17
12
QFIs are defined under SEBI circular No. CIR/IMD/DF/14/2011 dated August 9, 2011 as foreign investors who are
entitled to invest in equity and debt schemes of Mutual Funds in India and are resident in a country that complies
with the Financial Action Task Force standards and is also signatory to International Organization of Securities
Commission's Multilateral Memorandum of Understanding
13
Sub-accounts are defined under regulation 2(k) of SEBI (Foreign Institutional Investors) Regulations 1995 as any
person resident outside India on whose behalf investments are made by FIIs in India and who is registered as sub-
account under these regulations. They include foreign corporate, foreign individual, broad based funds or
portfolios established or incorporated outside India
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(b) Category II includes regulated entities like banks, assets management companies,
investment managers etc. and broad-based funds, which may be regulated such as mutual
funds, investment trusts etc. or non-regulated; and
(c) Category III includes investors, which are not covered under categories I and II. The
registration requirements are progressively difficult depending on the category under
which the investor falls with easiest formalities for category I investors. Unlike the
previous situation wherein the QFIs, FIIs and their sub-accounts were required to register
with SEBI for 1-5 years initially to operate, FPIs registration is carried out by SEBI
designated depository participants14 (“DDPs”) on permanent basis unless suspended or
cancelled. These changes may tend to ease out the initial approval process for FPIs and
subsequent operation by them compared to the previous situation.

Eligibility criteria for FPIs

FPI Regulation 4 prescribes the mandatory eligible criteria for registration as FPI. Here, the
applicant must be a non-resident in India but non-resident Indians (“NRIs”) are specifically
prohibited. While this spells “bad news” for NRIs, a fund having NRIs as its investors can
operate as a FPI as stated by SEBI. Further, the applicant is required to be a resident of a country
which meets the following criteria-

(i) its securities market regulator is a signatory to the International Organization of Securities
Commission’s Multilateral Memorandum of Understanding8 or party to an MOU with SEBI;

(ii) whose central bank is a member of the Bank for International Settlements in case if the
applicant is a bank; and

(iii) not mentioned in the public statement of Financial Action Task Force as a country having
issues related to combating financing of terrorism or money laundering. The applicant must
also be authorized to invest as per the law of its country of incorporation or place of business and
as per its Memorandum of Association and Articles of Association or any other equivalent
document. Borrowing from the FII Regulations, the following conditions have been made
applicable for registration as a FPI - (i) the applicant must have sufficient experience,
professional competence, good track record, financial soundness and a reputation for fairness and
integrity; (ii) must meet the criteria specified in the SEBI (Intermediaries) Regulations, 2008 and
(iii) grant of registration to the applicant must be in the interest of development of the securities
market. SEBI may specify any other criteria from time to time

14
Regulation 3(1) states that no person can buy, sell or otherwise deal in securities as a foreign portfolio investor
unless a certificate to that effect has been granted by the designated depository participant on behalf of SEBI
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FOREIGN VENTURE CAPITAL

INVESTMENT

Investment Vehicle

Venture capital plays a vital role in the development and growth of innovative entrepreneurships.
Venture capital financing started in India in 1988, with the formation of the Technology
Development and Information Company of India Ltd. (TDICI) promoted by ICICI and UTI
Bank. At the same time, the Gujarat Venture Fund Limited and the Andhra Pradesh Industrial
Development Corporation were started in the early nineties by state-level financial institutions.
Thus, venture capital was initially the prerogative of development financial institutions. The mid
nineties saw the rise of foreign venture capital funds, which focused on development capital
without any sectoral focus and were dependant more on opportunities. After the success of these
funds, a number of India-centric foreign VC firms emerged.
In the absence of an organized venture capital industry, individual investors and development
financial institutions have hitherto played the role of venture capitalists in India. Entrepreneurs
have largely depended on private placements, public offerings, and lending by financial
institutions. In 1973, a committee on the “Development of Small and Medium Enterprises”
highlighted the need to foster venture capital as a source of funding for new entrepreneurs and
technology. Later, a study was undertaken by the World Bank to examine the possibility of
developing venture capital in the private sector, based on which the Government of India took a
policy initiative and announced guidelines for venture capital funds (VCFs) in 1988.
Thereafter, the Government of India issued guidelines in September 1995 for overseas venture
capital investment in India. Further, as part of its mandate to regulate and develop the Indian
securities markets, the SEBI under Section 12 of the SEBI Act, 1992 framed the SEBI (Venture
Capital Funds) Regulations, 1996.
Investment Vehicle is an entity registered and regulated under relevant regulations framed by
SEBI or any other authority designated for the purpose and shall include Real Estate Investment
Trusts (REITs) governed by the SEBI (REITs) Regulations, 2014, Infrastructure Investment
 16

Trusts (InvIts) governed by the SEBI (InvIts) Regulations, 2014 and Alternative Investment
Funds (AIFs) governed by the SEBI (AIFs) Regulations, 2012.

A SEBI registered Foreign Venture Capital Investor may purchase15

 securities, issued by an Indian company engaged in any sector and whose securities are
not listed on a recognised stock exchange at the time of issue of the said securities;

 securities issued by a start-up, irrespective of the sector in which it is engaged;

 units of a Venture Capital Fund (VCF) or of a Category I Alternative Investment Fund

(Cat-I AIF) or units of a scheme or of a fund set up by a VCF or by a Cat-I AIF, subject
to the terms and conditions as may be laid down by the Reserve Bank

How can an FVCI make the investment?16

 purchase the securities/ instruments mentioned above either from the issuer of these
securities/ instruments or from any person holding these securities/ instruments;

 invest in securities on a recognized stock exchange subject to the provisions of the SEBI
(FVCI) Regulations, 2000, as amended from time to time;

 acquire, by purchase or otherwise, from, or transfer, by sale or otherwise, to, any person
resident in or outside India, any security/ instrument it is allowed to invest in, at a price
that is mutually acceptable to the buyer and the seller/ issuer; and

 receive the proceeds of the liquidation of VCFs or of Cat-I AIFs or of schemes/ funds set
up by the VCFs or Cat-I AIFs.

An FVCI can invest in an Indian company engaged in

 Biotechnology

 IT related to hardware and software development

 Nanotechnology

 Seed research and development

 Research and development of new chemical entities in pharmaceutical sector

15
SEBI (AIFs) Regulations, 2012
16
Foreign Investments in India, www.nseindia.com/content/us/ismr2011ch7.pdf, last seen 1/10/17
 17

 Dairy industry

 Poultry industry

 Production of bio-fuels

 Hotel-cum-convention centres with seating capacity of more than three thousand.

 Infrastructure sector
 18

PRIVATE PLACEMENTS WITH FPIs

The SEBI-registered FIIs have been permitted to purchase shares/convertible debentures of an

Indian company through offer/private placement, subject to a ceiling of 10 percent of the paid-up
capital of the Indian company for individual FPIs, and 24 percent for all FPIs put together.17 An
Indian company is permitted to issue such shares provided that:
i In the case of a public offer, the price of shares to be issued is not less than the price at which
the shares are issued to residents; and ii In the case of issue by private placement, the price is not
less than the price arrived at in terms of the SEBI guidelines or the guidelines issued by the
erstwhile Controller of Capital issues as applicable. Purchases can also be made of partially
convertible debentures, fully convertible debentures, and rights/renunciations/warrants/units of
domestic mutual fund schemes.
The important statutes that require complianwwce for private equity investment in India are the
Companies Act, 1956, the Foreign Exchange Management Act, 2000, and the Securities and
Exchange Board of India Act, 1992, along with the rules and regulations therein. For tax
exemption purposes, guidelines are issued by the Central Board of Direct Taxes (CBDT). The
PIPE deals are also governed by the SEBI Initial Capital Disclosure (ICD) Regulations, which
deals with the regulations relating to QIBs and Preferential Placement. Foreign Direct

Investments Most PE funds make FDIs under the automatic route, which does not require any
prior approval. However, there are certain sectors such as broadcasting, courier services, print
media, etc. in which investment is allowed only with the approval of the Foreign Investment
Promotion Board (FIPB). Further, FDIs are prohibited in a few sectors such as multi-brand retail
trading, gambling, betting, etc.

The RBI follows the definition of FDI given by the IMF, wherein PE investments more than 10
percent are treated as an FDI. Foreign institutional investors Foreign institutional investors
(FIIs), including private equity funds so registered, that are investing in the public markets have
to comply with the SEBI (Foreign Institutional Investors) Regulations, 1995. These limit FII
investment in an Indian company to 10 percent of the capital, and limit the aggregate investments
of all FIIs and its sub-accounts to 24 percent, the latter limit being amenable to modification
subject to sectoral limits.
 19

PRIVATE EQUITY INVESTMENTS

In India, the evolution of PE investments can be traced back to the formation of VC Funds in
India. The PE has now entered the economic mainstream, and this segment has gained
momentum particularly over the past few years. The concepts of VC and PE are very recent in
India as compared to the situation in countries such as the USA, the UK, Europe, Israel, and so
on, where they have been in existence for many years.

Private equity (PE) players are established investment bankers who typically invest into
proven/established businesses. The PE funds/players are among the largest sources of funding
for enterprises that are relatively secure with an established track record requiring significantly
large funds for expansion and growth. As such, they take reasonably well-defined risks, and their
exit strategy is usually up to the stage when the company goes public or gets acquired at high
value.
The PE funds are generally seen to attract a huge amount of capital from investors, including
pension funds, insurance funds, university foundations, and individuals. The PE investors can be
domestic or foreign private equity firms. Domestic PE firms are either established as trusts, or set
up as a company. All PE investments from outside the country are classified either as Foreign
Institutional Investment (FII) for investments in listed companies or as Foreign Direct
Investment (FDI) for investment in unlisted companies. If a PE investment takes place in an
unlisted firm, it falls under India’s FDI rules. A PE fund can also buy into listed companies.
However, in order to do such investments, the PE fund has to become a registered FII.
The important statutes that require complianwwce for private equity investment in India are the
Companies Act, 1956, the Foreign Exchange Management Act, 2000, and the Securities and
Exchange Board of India Act, 1992, along with the rules and regulations therein. For tax
exemption purposes, guidelines are issued by the Central Board of Direct Taxes (CBDT). The
PIPE deals are also governed by the SEBI Initial Capital Disclosure (ICD) Regulations, which
deals with the regulations relating to QIBs and Preferential Placement. Foreign Direct
Investments Most PE funds make FDIs under the automatic route,
which does not require any prior approval. However, there are certain sectors such as
broadcasting, courier services, print media, etc. in which investment is allowed only with the
 20

approval of the Foreign Investment Promotion Board (FIPB). Further, FDIs are prohibited in a
few sectors such as multi-brand retail trading, gambling, betting, etc.

The RBI follows the definition of FDI given by the IMF, wherein PE investments more than 10
percent are treated as an FDI. Foreign institutional investors Foreign institutional investors
(FIIs), including private equity funds so registered, that are investing in the public markets have
to comply with the SEBI (Foreign Institutional Investors) Regulations, 1995. These limit FII
investment in an Indian company to 10 percent of the capital, and limit the aggregate investments
of all FIIs and its sub-accounts to 24 percent, the latter limit being amenable to modification
subject to sectoral limits.
 21

SEBI- THE MARKET REGULATOR

For a growing and dynamic economy like India, capital markets play an important role in not just
attracting domestic and foreign investment but also mirror the state of affairs in our country. In
order to present the Indian dream most favourably among investors, it is important that our
capital markets have a strong and non-manipulative infrastructure and to ensure this, India has its
capital market regulator, the Securities and Exchange Board of India – SEBI.

With changing times and while facing newer challenges, SEBI has always taken responsibility
for everything that is right or wrong in India’s capital markets. Even now, when SEBI finds itself
surrounded by the din of chit funds siphoning off crores of rupees from gullible investors and a
need for tightening insider trading norms; the Indian government has happily obliged to SEBI’s
demand for more powers. Accordingly the government has promulgated Securities Laws
(Amendment) Second Ordinance, 2013 that would amend the SEBI Act, the Securities Contracts
(Regulation) Act and the Depositories Act. With these amendments, SEBI will be able to regulate
any money pooling scheme worth Rs. 100 crore or more and attach assets in cases of non-
compliance. The SEBI Chairman would have the authority to order "search and seizure
operations". The amended law would also allow SEBI to seek information, such as telephone call
data records, from any persons or entities in respect to any securities transaction being
investigated by it. The law would further allow setting up of special courts to speed up SEBI
related cases.

Rolling out red carpet for FIIs: In order to keep a close eye on FII inflow; the task of giving
approvals to FII registrations was handed over to SEBI in 2003 and since then SEBI has been
consistently revising the FII investment limit in both corporate as well as government debt.
Meanwhile, in order to discourage FII investments made through P-notes, SEBI has imposed
sufficient checks and balances to avoid the flow of black money into the Indian markets.17

IPO reforms: SEBI had last year notified wide-ranging reforms in Initial Public Offer -IPO
market which included a strict vigil on usage of issue proceeds, greater disclosure by companies
and their bankers and allotment of a minimum number of shares to retail investors. Keeping with
the times, SEBI has also introduced e-IPO procedure for electronic bidding in public offers to
help investors bid for shares in a cost-effective manner.

17
Rolling out Red Carpet for Investors, http://www.thehindu.com/2000/04/26/stories/0626000a.htm, last seen
1/10/17
 22

Fostering mutual funds: SEBI regularly issues revised guidelines for mutual fund industry to
help them flourish in India. Till early 90s, Unit Trust of India was the only player in India's
mutual fund market. Sebi's efforts not only encouraged hundreds of mutual funds to enter the
Indian markets, but also gave an opportunity to not so savvy investors to invest in the markets
through a much safer way. To enhance the popularity of mutual funds, SEBI relaxed know your
customer (KYC) norms for small investors and widened the distribution network in rural India
by roping in postal agents. By banning entry loads for mutual fund schemes in 2009, SEBI
curbed mis-selling of mutual fund product.18

18
SEBI-A Credible and Effective Regulator, http://newsonair.nic.in/SEBI-A-CREDBLE-AND-EFFECTIVE-
REGULATOR.asp, last seen, 1/10/17
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Conclusion

In India two kinds of Foreign Investments are allowed. Foreign direct and the other one is
Foreign indirect investment. Foreign investments in the country can take the form of investments
in listed companies (i.e., FII investments), investments in listed/unlisted companies other than
through stock exchanges (i.e., through the foreign direct investment or private equity/foreign
venture capital investment route), investments through American Depository Receipts/Global
Depository Receipts (ADR/GDR), or investments by non-resident Indians (NRIs) and Persons of
Indian Origin (PIOs) in various forms Whereas the RBI regulates the provisions for foreign
direct investment, SEBI lays down the provisions for exchange in capital market. Both the
regulators have their own jurisdiction to govern. Considering the ambit of the project, foreign
portfolio investment is a playfield settled by SEBI. Right from the issue of securities to returns
SEBI looks for everything. The current SEBI (Portfolio Investors) Regulation 2014 has been laid
down to set ceiling, criteria, returns and limits. Similarly, SEBI has also welcomed foreign
investors as the investment vehicles in terms of venture capitalists and private equity. For that
SEBI has enacted other legislation for Foreign Venture Capital Investment. SEBI being
omnipotent regulator for capital market is empowered with different powers for effective
implication. Section 11 of the SEBI Act gives SEBI wide powers to investigate in the matter suo
motu if there is threat to the protection of the investors. Also, the central government has tried to
give the regulator enough independence to make important legislations. Along with the SEBI, all
the operations of foreign investment is carried by RBI complying the provisions of FEMA. India
has been marked up as the best investment destination in recent years.
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References

ACTS/POLICIES

 SEBI (Foreign Institutional Investors Regulation) Act 1995

 SEBI (Foreign Portfolio Investors Regulation) Act 2014

 SEBI Act 1992

 FEMA 2000

 FDI Policy 2016.

ARTICLES

 SEBI- A Credible and Effective Regulator, Nisha Mohan Rane

 Foreign Investments in India, ISMR, NSE Publications

 Foreign Portfolio Investors- SEBI creates a new class of investors, Rachit Gupta

 Foreign investment in the Indian Government bond market

 SEBI and Foreign Investors, The Business Line

 Foreign Portfolio Investors, The Economic Times

WEBSITES-

 www.rbi.org

 www.sebi.nic.in