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HR Khan Committee on Foreign Portfolio Investment

  • Category
  • Published
    16th Oct, 2018

Based on Khan Committee’s interim report, Securities and Exchange Board of India (SEBI) is conceiving an idea to merge Non Resident Indian (NRI) and Portfolio Investment Scheme (PIS) routes with that of Foreign Portfolio Investors (FPIs).



  • Based on Khan Committee’s interim report, Securities and Exchange Board of India (SEBI) is conceiving an idea to merge Non Resident Indian (NRI) and Portfolio Investment Scheme (PIS) routes with that of Foreign Portfolio Investors (FPIs).
  • The committee was formed by SEBI under the chairmanship of HR Khan, former deputy governor of RBI, to suggest measures for revitalizing and streamlining FPIs.
  • The committee has suggested many reforms in foreign investment regulation mechanism in its interim report which were made public by the SEBI for comments last month.
  • Taking cue from the interim report, SEBI has initiated the process of reforms especially with regard to NRIs and Overseas Citizens of India (OICs) investments in India.


  • SEBI earlier this year issued a circular directing certain categories of FPIs such as trusts, banks, mutual funds, and investment managers to disclose their beneficial owners within six months. A beneficial owner is a person who, directly or indirectly, derives the benefits of ownership.
  • The regulator wanted to tighten KYC norms to prevent money laundering and round tripping of funds, especially if an investment is made via a high-risk jurisdiction. Typically, countries with a known history of money laundering and funding terrorism activities are considered as high-risk jurisdictions.
  • The circular said that Non Resident Indians (NRIs), Persons of Indian Origin (PIOs), Overseas Citizens of India (OCIs) and Resident Indians (RIs) cannot be beneficial owners of a fund investing in India.
  • The regulator also asked FPIs to disclose names and addresses of the beneficial owners; whether they were acting alone or together through one or more natural persons as a group.
  • Many stakeholders apprehended that the new guidelines would result in $75 billion worth of investments managed by OCIs, PIOs and NRIs, being disqualified from investing in India, and the funds would be withdrawn and liquidated within a short time frame.
  • Following the controversy and resistance from the stakeholders, SEBI issued another circular that is in compliance with recommendation of the Khan Committee which has already been constituted to rationalise FPIs in India.

The committee was mandated:

  • To rationalise the rules for foreign investors and come up with a policy regime without altering the broader framework.
  • To relook at rules for foreign institutional investors that are otherwise registered within matured jurisdictions like the US, but pool their money in tax haven jurisdiction.
  • To examine the time framework given to FPIs for making their funds broad based.
  • To examine the feasibility of asking persons of funds to share their personal details, since these funds are of high risk in nature.
  • To examine the feasibility of bringing NRIs and OCIs more under the net of SEBI regulations.
  • To bridge the gaps between hundreds of FAQs released by SEBI at various points and the actual regulations.


  • NRIs, overseas citizens of India and resident Indians should be allowed to hold non-controlling stakes in FPIs and no restriction should be imposed on them to manage non-investing FPIs or SEBI-registered offshore funds.
  • NRIs will be allowed to invest as FPIs if the single holding is under 25% and group holding under 50% in a fund, according to the panel.
  • Erstwhile PIOs should not be subjected to any restrictions, while clubbing of investment limits for well-regulated and publicly held FPIs having common control should be allowed.
  • Time for compliance with new norms should be extended by six months, after they are finalised and also the non-compliant investors should be given further 180 days to wind down their existing positions.
  • SEBI should do away with additional Know Your Customer (KYC) requirements for beneficial owner in case of government related FPI’s.


Based on the interim report of the Khan Committee, along with other reports such as A.R Dave panel on the Consent Mechanism and the T.K Viswanathan on Fair Market Conduct, SEBI has initiated a process of reforms in the capital market of the country.

  • SEBI eased the KYC norms and eligibility terms for FPIs. Now the beneficial ownership criteria in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules), will apply for KYC. As per the new norms clubbing of investment limit should not be done based on beneficial owner (BO).
  • There will be separate set of norms for determining conditions, wherein NRIs, OCIs and resident Indian are constituents.
  • NRIs, OCIs and resident Indians are allowed to be constituents of FPIs if a single NRI, OCI or RI holds less than 25% of holding.
  • Investment managers of NRIs, OCIs and RIs can control the FPI, if they are regulated in the home jurisdiction and registered with SEBI as a non-investing FPI. Such an FPI may be directly or indirectly fully-owned and controlled by an NRI, OCI, or RI.
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