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SEBI has eased restrictions on investments made via non-FATF nations


To encourage international investors to engage in Indian equities, the Securities and Exchange Board of India (Sebi) has eased its regulations for foreign portfolio investors (FPIs).

In nations where the Financial Action Task Force (FATF) is not a member, investors from such countries may nevertheless be eligible for registration.

Experts believe that the decision will benefit money and investments from Mauritius and West Asia, as well as from other nations and that it will improve the flow of funds and investments into India.

In September of last year, the Securities and Exchange Commission reclassified three categories into two: Category-I and Category-II. Compliance load reduced Know Your Customer (KYC) regulations and paperwork and fewer investment limits are some of the benefits of being in Category I. Such investors are exempt from indirect transfer restrictions when they subscribe and issue offshore derivative instruments.

Ease Of Restrictions

Previously, fewer than 3% of FPIs were classified as Category-I, while more than 45% were classified as Category-II. Approximately 13% of the funds were deemed to be of Category III status. To be eligible for Category-I designation, nations must be members of the Financial Action Task Force (FATF).” Indirect share transfer restrictions, like it’s shown here, would be exempted for FPIs from such nations, according to Rajesh Gandhi, a partner at Deloitte India. “This will stimulate inflows into India, notably from India-focused funds, together with the MSCI index revision.”

Mauritius and West Asian nations, according to experts, may now try to be on the Indian government’s list of designated countries.

Non-FATF nations and territories, such as Dubai, Cayman Islands, and Mauritius, would seek an exception from the Government of India because of the greater acceptance of Category-I FPI funds by investors, said Neha Malviya, director, Wilson Financial Services.

Mauritius, the Cayman Islands, Cyprus, and the British Virgin Islands all fall under Category-II of the International Financial Reporting Standards. FPI money continues to flow into Mauritius even after its treaty modification with India.

Category I registration will be available to nations that have been alerted by the FATF, which is a first.” Sunil Gidwani, a partner at Nangia Andersen, cited Mauritius, Cayman Islands, and Indonesia as notable non-FATF member nations for secondary investment in Indian stock markets.

According to Gidwani, achieving Category-I status would open their doors to new investors and provide FPIs more operational freedom . It is significantly simpler to enter the Indian market when you are registered as Category-I FPIs since there is less due diligence and paperwork required. It will not be necessary for them to comply with the offshore transfer tax laws since they may issue P-notes to foreign investors.

After a law change was implemented in 2012, the Indian government made it possible for Indians who transferred shares or interests in an entity outside of India to be taxed in India, provided that such shares or interests derived their value (directly or indirectly) substantially from assets in India. Indirect transfer clauses were used to describe these rules.

There had been a request for Sebi to alter its policy of permitting only members of the Financial Action Task Force (FATF) to apply for Category-I registration with the Financial Services Commission (FSC). To enable funds from FATF-compliant areas to be registered as Category-I FPIs, FSC authorities requested Sebi to change its standards.

The FATF’s grey-listing of the nation earlier this year exacerbated the government’s financial troubles. According to Sebi, the nation would still be eligible for FPI registration, but with heightened supervision as per FATF standards.

How Does FATF Work?

The Financial Action Task Force (on Money Laundering) (FATF) was established in 1989 by the G7 to create rules to fight money laundering. Terrorist funding was added to the agency’s jurisdiction in 2001.

It is the goal of the FATF to develop standards and support the successful implementation of measures to fight money laundering, terrorist financing, and other risks to the integrity of the global financial system. It is FATF’s role as a “policy-making organization” to help build the political will needed to implement national legislative and regulatory changes in these areas. The FATF conducts “peer assessments” (mutual evaluations) of member nations to monitor progress in implementing its recommendations.

The FATF blacklist (officially known as the “Call for action”) and the FATF greylist have been maintained by the FATF since 2000. (formally called the “Other monitored jurisdictions”)

An international effort to tackle money laundering was launched during a G7 summit in Paris in 1989. They were tasked with researching money laundering trends, keeping tabs on national and international legislation, financial activity, and law enforcement actions, submitting compliance reports, and coming up with proposals and guidelines to fight the practice. There were 16 members of FATF when it was established in 2001; by 2021, the membership had risen to 39.

The FATF published a report in its first year with 40 suggestions for improving the fight against money laundering. In 2003, these guidelines were updated to reflect changes in money laundering strategies and patterns..

Following the September 11 attacks, the organization’s mission was broadened in 2001 to encompass funding of terrorism.

Countries are given some latitude in adopting these principles in accordance with their unique circumstances and constitutional frameworks since they lay forth the principles for action.

There are new regulations on WMD, corruption, and wire transfers, as well as SR VIII (now called Recommendation 8), which the FATF codified in a single document in February 2012 (Recommendation 16).