Clubbing of investment limits explained

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The Securities and Exchange Board of India (SEBI) issued a circular on 10 April clarifying the clubbing of investment limits of foreign government-related entities registered as foreign portfolio investors (FPIs) under the SEBI (Foreign Portfolio Investors) Regulations, 2014. Some of the significant clarifications are as follows:

FPI investment limit. The purchase of equity shares of each company by a single FPI or an “investor group” shall be below 10% of the total paid-up capital of the company.

Investor group. In a case where the same set of beneficial owners are constituents of two or more FPIs and such investors have a common beneficial ownership of more than 50% in those FPIs, all such FPIs will be treated as forming part of a single investor group, and the investment limits applicable to a single FPI will operate with respect to all such entities by way of clubbing.

However, in respect of two or more foreign government-related entities with the same set of beneficial owners that invest through multiple entities, in cases where the Indian government enters into agreements or treaties with other sovereign governments, and where such agreements or treaties specifically recognize certain entities to be distinct and separate, SEBI may, during the validity of such agreements or treaties, recognize them as such, subject to conditions that it may specify.

Determination of beneficial ownership. The beneficial owner of foreign government entities and their related entities shall be determined in accordance with the prevention of money laundering laws of India, which provide for two methodologies for making this identification: (1) controlling ownership interest (also termed as ownership or entitlement); and (2) control in respect of entities having a company or trust structure.

In respect of partnership firms and unincorporated associations, ownership or entitlement will be the basis for identification of the beneficial owner.

Investment by a foreign government agency. (1) An arm/department/body corporate of a foreign government, (2) an entity set up by a statute enacted by a foreign government, or (3) an entity that is majority (i.e. 50% or more) owned by a foreign government shall constitute a foreign government agency.

The investment by foreign government agencies shall be clubbed with the investment by the foreign government/its related entities for the purpose of calculation of a 10% limit for FPI investments in a single company if they form part of an investor group.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.