Clubbing of Investments Limits Under FPI Regulations

The SEBI (Foreign Portfolio Investors) Regulations, 2014 regulate the registration and procedures of the foreign investors proposing to make portfolio investments in India.

The Securities and Exchange Board of India (SEBI) issued a circular on 10 April 2018 regarding the clarification on clubbing of investments limits of Foreign Portfolio Investors (FPI). The SEBI issued this circular as various stakeholders sought guidance on clubbing investment limits applied to a foreign government and its related entities.

Since SEBI monitors investments by foreign governments and their related entities, i.e. sovereign wealth funds, foreign central banks and foreign governmental agencies registered as FPIs in India, it issued the circular clarifying the clubbing of investment limits of FPIs. 

However, SEBI’s 10 April 2018 circular created challenges for FPIs, and various representations were made against it. The SEBI issued another circular on 13 December 2018, suppressing the directions given in the 10 April 2018 circular, and provided a revised framework on clubbing of investment limits of FPIs. These directions on the clubbing of investment limits of FPIs are discussed below.

Basis of Clubbing of Investment Limits of FPIs

The investment limits of the FPIs will be clubbed together on either the basis of-

• Common ownership of more than 50%, i.e. if there are more than 50% owners of two or more FPIs. 
• Common control, i.e. when the same person or same set of persons have control of two or more FPIs.

Exception of Clubbing of FPIs Based on Common Control 

There will be no clubbing of investment limits of the following FPIs based on common control in case of-

• FPIs that are appropriately regulated (regulated by the banking regulator or securities market regulator) public retail funds. 
• FPIs are public retail funds, majority-owned by appropriately regulated public retail funds on a look-through basis. 
• FPIs that are public retail funds and their Investment Manager (IMs) are appropriately regulated.

Public retails funds means- 

• Unit trusts or mutual funds that are open for subscription to retail investors and do not have specific investor type requirements. 
• Insurance companies where the segregated portfolio of one to one correlations with a single investor is not maintained. 
• Pension funds.

Control includes either or all of the following- 

• Right to appoint the majority of the directors. 
• Control the management.
• Policy decisions are exercisable by a person(s) acting individually or in concert, directly or indirectly, including by virtue of management or shareholding rights or voting agreements or shareholders agreements or any other manner.

Clubbing Provisions for Foreign Governments and Their Related Entities 

Investment limits of two or more FPIs, including foreign governments or their related entities having indirect or direct common ownership of more than 50% or control, their investment limits will be clubbed at the investment limit of 10% applicable to a single FPI.

The investment by foreign government agencies will also be clubbed with the investment by a foreign government or its related entities if they form part of an investor group at a 10% FPI investment limit for a single company.

Exception for Governments with Federal Structure

There will be no clubbing of investments of foreign governments or their related entities that are from different states or provinces of a country with a federal structure, provided the investing entities have different control and ownership.  

Exception for Certain Entities Recognised by Indian Government as Separate Entities

When the Indian government has entered into a specific treaty or agreement with the government of another country that specifically recognises certain entities to be separate and distinct, SEBI may relax the clubbing provisions for these FPIs during the validity of such a treaty or agreement. 

Consequences for any Breach of  Investment Limit 

In the case where the total investments by a group of FPIs clubbed based on the SEBI circular breaches the 10% investment limit in a single company, the respective FPIs will have the following alternatives- 

• To divest holdings in the Indian company to bring it below 10% of the paid-up capital within five trading days from the date of settlement of the purchase trade that resulted in a breach. 
• To treat investment in the concerned Indian company as Foreign Direct Investment.

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