GC Friday Interview: Kapil Seth, Head of HSBC Securities Services, India

Designated depository participants (DDPs) in India have begun to register foreign portfolio investors (FPIs) under the Securities and Exchange Board of India’s (SEBI) new regulatory regime. Kapil Seth, head of HSBC Securities Services, India, talks about the importance of the new regime for the country’s capital markets.
By Janet Du Chenne(59204)
Designated depository participants (DDPs) in India have begun to register foreign portfolio investors (FPIs) under the Securities and Exchange Board of India’s (SEBI) new regulatory regime. Kapil Seth, head of HSBC Securities Services, India, talks about the importance of the new regime for the country’s capital markets

GC: Can you comment on background to the launch of new regime?

KS: Investors had various ways of accessing the country in the past. The regime has now moved from the FII/QFI to the FPI. Previously, you had the portfolio FII/QFI on the one hand and the direct foreign investor route on the other. FPI is the new route for investors with a portfolio of investments. It is designed to make access to the Indian capital markets easier by simplifying the registration and documentation approval process.

The journey began in October 2012 when the securities market regulator, SEBI set up a committee that brought together the expertise of the government, the stock exchanges, legal authorities and market participants – the objective of which was to ease the process of entering and investing in India.

The committee submitted its report in mid-2013 and the FPI regulations were released in January 2014. From the 1st of June 2014, FPI registration went live with the registration of the first FPI.

This has marked a substantial change to the previous architecture that was in place since 1995.

GC: Describe your work with the regulator in making the scheme possible.

KS: We were in the SEBI committee that reviewed the market access routes and resubmitted their findings including on KYC. The key challenges were the prescriptive nature of the documentation requirements in the market and the existence of some structural issues.

The committee report was the start of the journey. There were significant bodies involved across the ministry of finance and the Reserve Bank of India (RBI). They looked at various aspects including aligning on KYC requirements, risk management framework for FPIs etc. The regulatory framework requires investors to open both cash and securities accounts and hence alignment between RBI and SEBI was imperative. Meanwhile, the ministry of finance clarified the overarching KYC requirements.

Continuity was achieved in tax treatments with the tax rules for FPIs remaining same as that of FII. Also, the margins remain the same for institutional investors. Significant discussions took place across the regulators and the ministries in order to make the regime change feasible. As a large custodian in India we were active in these market discussions.

GC: Who would be interested in this new regime?

KS: All portfolio investors would be interested in the regime as it’s the only route for portfolio investments into India. The key impact would be for private and commercial banks, unregulated funds, portfolio investors, foreign individual investors and family offices. With simplified access being the most important change there are three core areas where it would have an impact: The first is market entry. There is now risk-based KYC as opposed to one-size fits all approach to KYC, which means there are no longer the same proof of identity and proof of address required for signatories, senior management etc. It is made simpler.

Secondly, the access is wider. This is the basic tenet. If you’re an investor from an IOSCO jurisdiction and not from a FATF negative or high-risk jurisdiction and willing to share beneficial ownership, you are welcome as a FPI in the segregated account structure applicable. This opens the regime up to corporates, funds, individuals and unregulated entities. There is a broader range of investors as it removes the structural registration barriers. For example for banks the regulations previously required them to sponsor broad based funds. This was a limitation for some banks and they can now access one prop account without the need to have a broad based fund and this is beneficial for their fixed income desks to have direct access to the market.

Thirdly, the new regime should make market access quicker as SEBI has authorized Designated Depository Participants (DDPs) to issue FPI licenses, whereas under the FII route, investors had to be registered with SEBI directly. There are currently 17 DDPs registered with SEBI.

Even the 8000 existing investors are impacted because when it comes to them renewing their licenses they will benefit from the simplified process. The tenet of the new regime is that it will be simpler, faster and wider.

GC: How big do you expect this market to become?

KS: FPI will be the only route to entry for portfolio investment and based on what we have seen, the growth story will be interesting. At the end of March 2014 the quantum of FII investments was $265 billion. Existing FII investors are grandfathered and it is difficult to predict how big the market will become as FPI investments essentially reflect the interest of portfolio investors into India as an investment destination. The net inflow into equities since January 2012 has been in excess of $50 billion. Foreign portfolio investment is currently approximately 19% of the market cap, up from 15% in 2011. YTD 2014 we saw $15 billion net inflows into India. Of that amount, $7.5 billion was in equity, and $7.5 billion in fixed income. Hence, with the current optimism in the markets we look forward to further market growth and the FPI norms should make market access easier.

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