A study on Qualified Foreign Investments (QFI): the system and its benefits to Foreign Nationals

Key Words
DP Depository Participant KYC Know you customer QFI Qualified Foreign Investor SEBI Securities & Exchange Board of India PML Prevention of Money Laundering MF Mutual Funds

Executive Summary
The Central Government, vide press release dated January 1, 2012 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. In order to facilitate the above and in consultation with the Government and RBI, it has been decided that 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. 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.

Table of Contents
Contents
Introduction .................................................................................................................................................. 5 Overview of Investment................................................................................................................................ 5 Direct Route .............................................................................................................................................. 5 Indirect Route ........................................................................................................................................... 6 Analytical Interpretation ............................................................................................................................... 6 Conclusions ................................................................................................................................................... 6

Introduction
QFI shall mean a person resident in a country that is compliant with Financial Action Task Force (FATF) and that is a signatory to International Organization of Securities Commission's (IOSCOs) Multilateral Memorandum of Understanding. QFI should be a person who is not a resident of India QFI shall not be registered with SEBI as a FII or a sub-account of the FII or Foreign Venture Capital Investor MF shall ensure compliance with KYC requirements as per FATF standards, Prevention of Money Laundering Act, 2002 (PMLA), rules of PMLA and SEBI circulars issued before accepting subscriptions from QFI. MF / DP may use the combined KYC cum PAN form to be notified by the Central Board of Direct Taxes (CBDT).

Overview of Investment
Direct Route
DP shall have paid up capital of minimum ` 500 million and registered with SEBI DP shall be either a clearing bank or clearing member of any of the clearing corporations. DP shall demonstrate that it has systems and procedures to comply with the FATF Standards, PMLA and SEBI circulars issued from time to time. DP shall obtain prior approval of SEBI before commencing the activities relating to accepting MF subscription from QFIs

Indirect Route
MF shall appoint one or more UCR issuing agent overseas. UCR issuer appointed by MF shall act as agent of the MF MF can appoint entities as UCR issuer if such entity has proven track record, expertise and technology in the business of issuance of global depository receipts/ global custody agency and is registered with an overseas securities market / banking regulator. MF shall seek no objection from SEBI before appointing any UCR issuer.

Analytical Interpretation
Income distributed on units is exempt in the hands of the unit holders as the MF is liable to pay income distribution tax (similar to dividend distribution tax The benefits under the respective double taxation avoidance agreements should be applicable on the capital gains where the foreign investor is a tax resident of the respective countries.

Conclusions
The scheme will widen the class of investors, attract more foreign funds, reduce market volatility and will help in increasing the depth of the Indian capital market