QFI and FII; ECONOMICS-23/07/2014

The Reserve Bank of India, on Tuesday, simplified foreign portfolio INVESTMENT norms by putting in place an easier registration process and operating framework with an aim to attract inflows.

“The portfolio investor registered in accordance with the Securities and Exchange Board of India (SEBI) guidelines shall be called Registered Foreign Portfolio Investor (RFPI),” the RBI said in a notification.

The existing portfolio investor class, namely, Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) registered with SEBI shall be subsumed under RFPI, it said.

Who is a Qualified Foreign Investor?

QFIs shall include individuals, groups or associations that are:

1. Resident in a country that is a member of the FINANCIAL Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and
2. Resident in a country that is a signatory to IOSCO’s MMOU – or a signatory of a bilateral MOU with Securities and Exchange Board of India (SEBI).

 A QFI should neither be a person resident in India nor should be registered with the SEBI as a Foreign Institutional Investor (‘FII’), sub-account or Foreign Venture Capital Investor.

A QFI should be set up with a SEBI - registered Qualified Depository Participant (QDP) to commence activities. The QDP shall provide inter alia custody services.

Who are Foreign Institutional Investors (FIIs)?

Foreign Institutional investors (FIIs) are entities established or incorporated outside India and make proposals for investments in India. These INVESTMENT proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporates, individuals, funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that are authorised to deal with them. The biggest source through which FIIs invest is the issuance of Participatory Notes (P-Notes), which are also known as Offshore Derivatives.

***Sub-Account: A segregated balance of funds (account) for which the bank acts on behalf of the account holder.

***Particapatory Notes: Participatory Notes -- or P-Notes or PNs -- are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian STOCKmarkets without registering themselves with the market regulator, the Securities and Exchange Board of India.

FINANCIAL instruments used by hedge FUNDS that are not registered with Sebi to invest in Indian securities. Indian-based brokerages to buy India-based securities / stocks and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors.

Why P-Notes?

Since international access to the Indian capital market is limited to FIIs. The market has found a way to circumvent this by creating the device called participatory notes, which are said to account for half the $80 billion that stands to the credit of FIIs. INVESTING through P-Notes is very simple and hence very popular.

What are hedge funds?

Hedge funds, which invest through participatory notes, borrow money cheaply from Western markets and invest these funds into stocks in emerging markets. This gives them double benefit: a chance to make a killing in a stock market where stocks are on the rise; and a chance to make the most of the rising value of the local CURRENCY.

Who gets P-Notes?

P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII looks after all the transactions, which appear as proprietary trades in its books. It is not obligatory for the FIIs to disclose their client details to the Sebi, unless asked specifically.

FII VS QFI

Particulars	FII	QFI
Investors Permitted	Foreign entities like pension funds, mutual funds, insurance companies, INVESTMENTtrusts, banks, asset management companies, investment managers, advisors, institutional portfolio managers, etc. are all considered under the FII category	QFI includes individuals, groups or associations, resident in a country that is a member of the FATF or a country that is a member of a group which is a member of FATF or… Resident in a country that is signatory to IOSCO's MMOU or a signatory of a bilateral MOU with SEBI. QFIs do not include FIIs / Sub-Accounts / FVCIs
SEBI Registration	Required	Not required
SEBI Registration Fee & Tenure (Subject to change by Regulator)	FII - US$5,000 for 3 years. Renewal fee is the same. Sub-Account - US$1,000. Validity is co-terminuswith the FII registration under which it is registered.	Not required
Permissible Transactions	All securities in primary and secondary markets including shares, debentures, warrants, etc. issued by companies engaged in the business wherein foreign INVESTMENT is permitted.	Purchase and sale of listed equity shares (delivery-based only), IPOs, rights issues, bonus shares, stock splits, shares received due to corporate actions, dividends, open offer, buy-backs of listed companies and equity schemes of mutual FUNDS. Debt - Purchase and sale of corporate debt securities listed on recognized STOCK exchanges, purchase of corporate debt securities through public issues, if listing on recognized stock exchange(s) is committed, sale of corporate debt securities by way of buyback or redemption by the issuer, purchase and sale of units of debt schemes of Indian mutual funds.
Issue of offshore derivative instruments / participatory notes against shares in India	Permitted	Not permitted
Taxation	Taxation under advise from local CPA	Applicable tax deducted at source by QDP on account of profits / gains / dividends or any other income accruing to or received by QFI. Taxation will be applicable as per CBDT Circular as per the extent rules, regulations and procedure

SOURCE: 

1. http://www.thehindu.com/

2. http://investindia.kotak.com/

3. economictimes.indiatimes.com

4. www.investopedia.com

5. http://www.rediff.com/

6. http://www.kotaksecurities.com/