The Securities and Exchange Board of India (Sebi) board has approved a proposal to allow foreign portfolio investors (FPI) into physically-settled non-agri commodities, along with a slew of other measures, at its board meeting on Thursday.
Foreign investors would now be allowed to trade in non-agricultural index derivatives because such contracts are cash settled, regardless of the nature of their underlying commodities. For physically settled non-agricultural commodities, FPIs would have to square off positions before the start of the tender or staggered delivery period, three days before expiry.
FPIs currently have access to non-agricultural commodity derivatives that are cash settled, while bullion and base-metal contracts are physically deliverable.
If they do not do so, open positions could be automatically transferred to a designated trading member or trading-cum-clearing member’s proprietary account. The move is aimed at improving foreign investor participation in India’s commodity markets, which would help boost volumes in the segment.
PMS overhaul
The regulatory board has also approved an overhaul of portfolio management services (PMS) regulations.
The Sebi board has allowed portfolio managers’ route for investing in mutual fund units (PRIM) to offer professionally managed portfolios of mutual fund investments. PMS firms can now introduce mutual-fund-only PMS schemes, which would allow portfolio managers to offer professionally managed portfolios of mutual fund investments. This would allow portfolio managers to manage client money in direct plans of mutual fund schemes, including exchange-traded funds and specialized investment funds, through a separate MF-PMS registration.
Discretionary PMS firms can now expand their investments into investment-grade unlisted debt securities.
The new norms would also allow access to overseas markets through investments in listed foreign equities, listed debt securities and overseas mutual funds, as well as overseas real estate investment trusts.
PMS allows professional fund managers to manage customized investment portfolios for affluent investors, with the minimum investment currently set at ₹50 lakh.
Settlement changes
The regulator has also changed Sebi’s settlement framework. In August, the regulator issued a consultation paper proposing a review of the Sebi (Settlement Proceedings) Regulations, 2018.
The review followed Sebi’s finding that in cases where settlement applications were rejected or withdrawn and the matter subsequently resulted in a penalty, the settlement amount averaged about eight times the final penalty. Under the new framework, Sebi expects the gap to narrow to about four times.
Wrongful gains would now continue to be disgorged but would be excluded from the base-amount calculation. Sebi would also use a fast-track mechanism under which cases involving settlement amounts of up to ₹10 lakh would not be referred to the High Powered Advisory Committee. This would remove a layer of deliberation between the Internal Committee and whole-time members.
The regulator has also opened up an opportunity for entities to settle before Sebi initiates formal proceedings against them by issuing settlement notices before any action is taken.
Accredited investors
The Sebi board has also approved a proposal to allow managers of alternative investment funds (AIFs) and asset management companies (AMCs) offering specialized investment funds (SIF) and PMS to accredit investors. The existing route through accreditation agencies will continue.
Accredited investors are individuals or entities deemed financially sophisticated enough to take on higher-risk investments. Individuals qualify with an annual income of at least ₹2 crore or a net worth of ₹7.5 crore, with at least half in financial assets, among other criteria. Companies and trusts require a net worth of at least ₹50 crore.
Investors will now be eligible for accreditation based on their exposure to the Indian stock market with a threshold of ₹5 crore for individuals, HUFs, family trusts and sole proprietorships and ₹20 crore for body corporates and other trusts.
Additionally, FPIs can also be accredited investors, a provision not currently available.
“This will enable sophisticated investors based outside India ease of access to eligible Indian securities market products and also facilitate inflow of foreign capital,” according to a Sebi press release.
Under Sebi’s new common advertisement code for regulated entities, asset management companies (AMCs) would now be allowed to publish celebrity endorsements for the fund house on a pre-approved basis. The provision was previously restricted to industry-level advertisements.
Reit access
The board also considered the regulator’s proposals on real estate investment trusts (Reits), infrastructure investment trusts (InvITs) and vault managers.
Reits and InvITs can now raise funds from foreign investors through depository receipts. While foreign investors can already invest in these instruments under India’s foreign investment rules, Sebi’s regulations do not specifically provide for the issuance of depository receipts for their units.
The regulator has also approved a proposal to expand the scope of the Sebi (Vault Managers) Regulations, 2021. The framework was introduced for the secure and standardized storage of gold underlying electronic gold receipts traded on recognized stock exchanges.
Sebi, in its consultation paper in August, said that the market for physically backed precious-metal investment products has expanded significantly, with increased assets, trading activity and investor participation in gold and silver ETFs and physically settled derivatives. The regulator has said the vaulting of gold and silver underlying these products is currently outside its vault-manager framework.
