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The Securities and Exchange Board of India (Sebi) has said investors who come in through the newly

-formed qualified foreign investors (QFI) route cannot “indirectly” channelise investments into the country through any other route. While this move would keep out people already investing in Indian stocks through participatory notes (P-notes) and overseas derivative instruments (ODIs) from using the QFI route, Sebi further said QFIs themselves “cannot issue offshore derivative instruments, or participatory notes”, to other investors. Sebi’s clarifications came as part of a larger document, in the form of frequently-asked questions (FAQs), released by the regulator in time for global roadshows planned by the government to attract investors to the country. The FAQ said the same set of beneficial owners cannot use two routes simultaneously. “The same set of ultimate beneficial owners(s), who intend to make investments through the QFI route, shall not directly or indirectly channelise investments simultaneously into Indian equities using any other available route,” Sebi said. According to data provided by Sebi, P-note investments were worth a little over Rs 1.3 lakh crore at the end of April.

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“These (P-note) investors have to wind up their existing investments if they wish to take part in the QFI regime,” a senior official with an intermediary said. Other available routes that are not permitted for simultaneous investments include non-resident Indians (NRI), foreign institutional investors (FII), sub-account and foreign venture capital investors (FVCI). However, foreign direct investment (FDI) would be an exception to this rule.

CRACKING THE QFI PUZZLE
     QFIs can’t issue P-notes to other investors P-note investors, NRIs have to exit existing positions to take the QFI route Broader definition given for “opaque structures” Details of ultimate beneficial owner(s) should be accessible at all the times QFIs to be treated on par with non-institutional bidders aka HNI category in IPOs

“The same person/entity can make investments through the FDI and QFI route. However, where a person invests in a company through both FDI and QFI route, the aggregate holding of such a person in the company shall not exceed five per cent of the paid-up equity capital of the company at any point of time,” the document said. At present, several investors who do not want to register as foreign institutional investors, invest in Indian stocks by purchasing p-notes. However, the identity of these investors are reported to Sebi through various periodical statements. To ensure that entities having opaque structures, where details of the ultimate beneficiary are not accessible, are not used under the QFI regime to camouflage investments through different routes, Sebi has broadened the definition of these opaque structures.

Accordingly, any structure such as protected cell company or segregated cell company should be deemed to be opaque structure. Sebi acknowledged that “there is no exhaustive list of opaque structures,” but laid down certain guiding principles to be followed by the intermediaries. “The details of ultimate beneficial owner(s) should be accessible at all the times. The structure should not ring fence the assets and liabilities of different pools of fund. The structure should not ring fence the pools of funds from enforcement,” the regulator said. Sebi also, for the first time, has cleared the air on investments by NRIs under the QFI route. “An NRI cannot make investments simultaneously through the QFI route and portfolio investment scheme route. An NRI can open a demat account as a QFI and make investments through this route, provided he has closed all his demat account(s) opened as an NRI,” the FAQs said. In the mutual fund space, QFIs will not be able to avail of facilities such as switching from scheme of one fund house to another and investment through systematic investment plans. In the primary market, QFIs will be treated at par with Indian non-institutional investors, Sebi said.