In a consultation paper issued recently, the Securities and Exchange Board of India (Sebi) has proposed to allow higher investments from Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) through Foreign Portfolio Investors (FPIs) operating out of International Financial Services Centers (IFSC).
Market experts believe that Sebi’s proposal comes at a time when it is perceived that the market regulator looks at the NRI/OCI community through a lens of suspicion due some of the past events. By increasing the limit, it is giving out a message that it is comfortable with the community investing in Indian markets, provided they follow the guidelines imposed by the regulator. Further, it is seeking to strike a balance between higher foreign investments and risks associated with overseas entities controlled by Indian-origin people, owing to the possible proximity of such non-resident Indians (NRIs) with Indian companies and promoters.
The current norms don’t permit an FPI applicant to be an NRI or OCI. While they can be investors to an FPI, a single NRI/OCI is not allowed contribute above 25% of the total corpus of the FPI, with the total contribution of both categories capped at 50% of the corpus.
Sebi’s new proposal comes with conditions that the FPI operate out of the IFSC, and furnish granular details of ownership and control if the FPI has over Rs 25,000 crore in equity AUM or holds more than 33% of its equity assets in a single group.
Agrawal added that the proposal arrives at a crucial juncture, considering the compliance challenges highlighted by the Adani-Hindenburg incident that directed both regulatory focus and Sebi’s scrutiny towards FPIs. He pointed out that the regulator’s willingness to embrace entities governed by the IFSC Authority reflects its forward-looking stride, encouraging higher inflows of NRI/OCI and FPI investments and simultaneously keeping the ghosts of the Ketan Parekh scam at bay.
It has invited comments on the recommendations by September 10.
While NRIs/OCIs have the avenue of investing in Indian securities through the Portfolio Investment Scheme (PIS) route, Sebi has received feedback that the route restricts NRIs from investing in India through overseas pooled structures managed by professional managers. This deprives them of the benefit of investment management by professionals.
Another feedback was that limiting the contribution by NRIs/OCIs increases the compliance burden and cost on FPIs’ investment managers. This is because any redemption request from non-NRI/non-OCI investors in an FPI will automatically cause a hike in the percentage contribution by NRIs/OCIs. This will require the investment manager to either arrange for fresh non-NRI and non-OCI investments, or forcibly redeem investments of NRIs/OCIs to restore the threshold.
Consequently, many foreign funds either exclude India from their portfolio or do not accept any participation from NRIs/OCIs, resulting in loss of investment opportunities into India.
“While the intent is to liberalise foreign investments through NRIs and OCIs by relaxing the aggregate percentage, Sebi has considered the apprehension of market manipulation and risks associated with NRI/OCI-owned entities. In view of the same, the relaxation envisaged under the regulations is only available to entities registered with the IFSC and regulated by the IFSC Authority. The exception for IFSC has been carved after considering that it has better information-sharing mechanism with Sebi and more effective monitoring under the PMLA and FEMA regime,” said Manmeet Kaur, Principal Associate, Karanjawala & Co.
Money laundering, market manipulation, circumventing takeover regulations, exceeding the PIS threshold were issues highlighted in the JPC report of 2002 as regards the role of Overseas Corporate Bodies (entities owned directly or indirectly at least 60% by NRIs or people of Indian origin) in the market scam of 2001.