Investment by Qualified Foreign Investors (QFI) in Indian equity shares
Summary
This circular permits Qualified Foreign Investors (QFIs) to directly invest in Indian equity shares to widen the investor base and deepen capital markets. It mandates that QFIs must hold shares in demat accounts with SEBI-registered Depository Participants who meet specific capital, operational, and compliance criteria. The document outlines eligible transactions, account opening procedures, and strict due diligence requirements for DPs regarding beneficial ownership and regulatory compliance. This section mandates that Depository Participants (DPs) maintain segregated rupee pool accounts and demat accounts for Qualified Foreign Investors (QFIs) while ensuring compliance with anti-money laundering standards. It establishes strict investment restrictions, including a prohibition on offshore derivatives and specific shareholding limits of five percent per QFI and ten percent aggregate per company class. The regulations further outline monitoring procedures for these limits, requiring depositories to publish data, manage caution lists, and enforce prior approval mechanisms for purchases exceeding thresholds. This section mandates the divestment of excess QFI holdings within three work
Text
The Central Government has announced its decision to allow QFIs to directly invest in Indian equity market in order to widen the class of investors, attract more foreign funds, reduce market volatility and to deepen the Indian capital market.
Foreign investors termed as Qualified Foreign Investors/ QFI who meet prescribed Know Your Customer (KYC) requirements may invest in equity shares listed on the recognized stock exchanges and in equity shares offered to public in India. In order to enable this they will hold equity shares in a demat account opened with a SEBI registered qualified Depository Participant.
The QFI for the purpose shall have the same meaning as that provided in para 3.1 of SEBI circular Cir/IMD/DF/14/2011 dated August 09, 2011.
To become a qualified Depository Participant (hereinafter referred to as “DP”), a SEBI registered DP shall fulfill the following: 4.1. DP shall have paid up capital of Rs. 50 crore or more; 4.2. DP shall be either a clearing bank or clearing member of any of the clearing corporations; 4.3. DP shall have appropriate arrangements for receipt and remittance of money with a designated Authorised Dealer (AD) Category - I bank; 4.4. DP shall demonstrate that it has systems and procedures to comply with the FATF Standards, Prevention of Money Laundering (PML) Act, Rules and SEBI circulars issued from time to time; and 4.5. DP shall obtain prior approval of SEBI before commencing the activities relating to opening of accounts of QFI.
All DPs who have obtained approval of SEBI for undertaking activities relating to accepting investments by QFI in Mutual Fund schemes need not obtain separate approval from SEBI for commencing the activities relating to investments by QFI in equity shares.
The DP shall ensure that transactions of QFI are limited only to the following: Purchase of equity shares in public issues, to be listed on recognised stock exchange(s); Purchase of listed equity shares through SEBI registered stock brokers, on recognized stock exchanges in India; Sale of equity shares which are held in their demat account through SEBI registered stock brokers; Purchase of equity shares against rights issues; Receipt of bonus shares or receipt of shares on stock split/ consolidation; Receipt of equity shares due to amalgamation, demerger or such other corporate actions, subject to the investment limits; Receipt of dividends; Tender equity shares in open offer in accordance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; Tender equity shares in open offer in accordance with SEBI (Delisting of Equity Shares) Regulations, 2009; Tender equity shares in case of buy-back by listed companies in accordance with SEBI (Buyback of Securities) Regulations, 1998
A QFI can open only one demat account with any one of the DPs and shall make purchase and sale of equity shares through that DP only. In case of jointly held demat accounts, each of the joint holders shall meet the requirements specified for QFI and each shall be deemed to be holding a demat account as a QFI. Depositories/ DP shall have adequate systems to ensure the compliance of the same and perform KYC due diligence for each of the joint holders. The DP shall carry necessary due diligence and obtain appropriate declarations and undertakings from QFI to ensure that no other demat account is held by any of the QFI as a QFI or in any other capacity such as NRI, before opening a demat account.
The DP shall ensure that the same set of ultimate/ end beneficial owner(s) are not allowed to open more than one demat account as QFI. For this purpose, the DP shall carry out necessary due diligence and obtain appropriate declarations and undertakings from QFI.
A QFI can open trading accounts with one or more SEBI registered stock brokers
The DP shall ensure that only QFI who meet the conditions stipulated in para 3.1 of SEBI circular Cir/IMD/DF/14/2011 dated August 9, 2011 are allowed to invest in equity shares. Additionally, the DP shall ensure that only those entities are allowed to open demat account as QFI whose ultimate/ end beneficial ownership is not resident in India. The DP shall carry out necessary due diligence for the same at the time of account opening. An express undertaking to this effect shall be obtained by DP from the QFI.
The entities having opaque structure(s) such that the details of ultimate/ end beneficiary are not accessible or where the beneficial owners are ring fenced from each other or where the beneficial owners are ring fenced with regard to enforcement shall not be allowed to open demat account as QFI. The DP shall perform appropriate due diligence at the time of account opening and ensure that such entities are not allowed to open demat account. An express undertaking to this effect shall be obtained by DP from the QFI
In case of any direct/ indirect change in structure or beneficial ownership of the QFI, it shall bring the same to the notice of its DP, forthwith. The DP shall assess the eligibility of that QFI afresh, before allowing it to undertake any further transactions.
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Source: SecMarx — Investment by Qualified Foreign Investors (QFI) in Indian equity shares. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.