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Sebi Relaxes FII Entry Norms; Tightens Buyback Rules

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In a wide-ranging overhaul of rules to make India an easier, safer and attractive investment destination, Sebi on 25 June unveiled a new set of streamlined entry norms for foreign investors, while putting in place checks against any wrongdoings by the company promoters.

Sebi is easing norms during a period of global market turmoil that has seen foreign investors sell $5.49 billion in debt and stocks this month. Analysts warned these regulations alone were unlikely to reverse these outflows in the near term. "Simplification is positive, but concerns on rupee and fundamentals would be the main trigger for FII flows in the near term," said G. Chokkalingam, chief investment officer at Centrum Wealth Management, referring to foreign institutional investors.

The board of capital markets regulatory authority also paved way for direct listing of start-ups and SMEs on the stock exchanges without the requirement of an IPO and approved a new set of rules for angel investors to encourage the spirit of entrepreneurship in the country.

About a dozen of these steps, which were approved by the board of Sebi (Securities and Exchange Board of India) in a meeting here that lasted for over five hours, come at a time when Indian markets have been going through turbulent times amid concerns over falling value of and huge outflows of overseas funds from the country.

With regard to the foreign investors, Sebi's board approved making their registration and compliance requirements much simpler and easier, especially for government entities and large investors like insurers, asset management companies and university funds from abroad.

The foreign investment rules will need final approval from the government, which is keen to attract foreign flows in a bid to narrow a current account deficit that hit a record high of 6.7 per cent of gross domestic product in the December quarter.

Overseas investors will now be classified into a newly created Foreign Portfolio Investors category as long as their equity stake in a company does not exceed 10 per cent. Purchases above that amount by a single investor will be governed under Foreign Direct Investment rules.

India will also reduce the number of disclosures that foreign investors need to make, and overseas funds will also be classified into three categories depending on their risk profile, with varying degrees of restrictions. Sebi also mandated companies announcing share buybacks will need to complete them within six months, down from the current one-year deadline, and they will need to buy at least 50 percent of the proposed purchases to avoid monetary penalties.

A company which completes a buyback will additionally not be allowed to raise fresh capital or conduct another purchase of its own shares for one year after the original buyback.

The rules are meant to counter perceptions some companies are looking to boost their shares by announcing buybacks they do not actually intend to undertake, or do not fully fund.

The market regulator added it will allow angel funds to invest in start-ups under its alternative funds regulations, and allow proprietary trading by asset managers on India's nascent debt exchanges.

Sebi will also allow start-ups and small companies to list on a special trading platform for institutional investors without having to resort to an exchange listing.

The decisions were taken after a discussion on a report of the 'Committee on Rationalisation of Investment Routes and Monitoring of Foreign Portfolio Investments' under the Chairmanship of former Cabinet Secretary K.M. Chandrasekhar.