SEBI plans to curb potential round-tripping through FIIs and also increase transparency. If successfully implemented, the move will segregate the opportunistic short-term investors from the committed long-term ones
Market regulator Securities and Exchange Board of India (SEBI) has asked all foreign institutional investors (FIIs) not to follow a protected cell company (PCC) or segregated portfolio company (SPC) structure.
A PCC or SPC is an entity with several cells within the same fund vehicle that may represent distinct investment objectives. A cell within the PCC or SPC has its own assets and liabilities as well as capital, dividends and accounts. This helps the fund manager to market a single fund which can have different investment plans for different investors.
"The FII has to declare that it is not a protected cell company (PCC) or segregated portfolio company (SPC) and doesn't have an equivalent structure,” SEBI said in a circular. FIIs have also been directed to declare that they are not a multi-class share vehicle (MCV) by constitution and do not have an equivalent structure. FIIs have to declare that their investment contains only single-class shares instead of MCVs, the market regulator said.
PCCs or SPCs are commonly used in the formation of collective investment schemes as umbrella funds and for the formation of captive insurance companies. They are also sometimes used as asset-holding vehicles, characteristically where each portfolio holds a single ship or aircraft, and they can also potentially be used in capital market debt issuances.
"While we understand the regulators’ concerns about round-tripping and money laundering by Indian residents, we believe that a blindfolded blanket ban on FIIs and genuine investors may not be the correct remedy. We believe that money laundering and round-tripping for tax evasion issues should be rather checked by stronger and robust exchange controls," said law firm Nishith Desai Associates, in a report.
Despite satisfying the broad-based fund criteria at the entity level, the fund vehicle has flexibility to pursue dedicated investment strategies for identified investors. This goes against the essence of a broad-based fund, as the investment does not represent the interest of all the investors, but of specific investors as per their investment strategy.
Though SEBI has provided almost six months for the sunset provisions, it would jeopardise the structures of many existing FIIs and sub-accounts which were structured as MCVs or have a PCC or SPC in their group structure, the law firm added.
Because of the relative ease of forming multiple offshore companies in most jurisdictions where SPCs are available for incorporation, and because it is uncertain how the concept of segregated portfolios and thus no consequential cross-contamination of liabilities would be treated in an onshore bankruptcy or by credit ratings agencies, many promoters still instead opt for the formation of multiple companies under a single holding company.
Similarly, the market regulator had expressed concerns for fund vehicles structured as MCVs, adding new classes of shares or sub-funds after seeking registration as a sub-account. SEBI said that FIIs declaring that they were not MCVs would need to ensure that they had only one category of investors, also referred to as single class of shares.
Typically, MCVs are used in two ways. The first option is to have a common portfolio that has at least 20 investors at the FII level. The second option is to have a segregated portfolio for each class of investors, where each class must have a minimum of 20 investors. SEBI has asked FIIs that were registered before 7th April to comply with the norms by September end.
"In today’s global scenario, apart from the developing economies, India stands to compete with the developed Western markets also for foreign inflow of capital. Therefore, it is imperative that the Indian regulators ensure that genuine foreign investments are not hindered due to an adverse regulatory regime, which may lead to diversion of India-dedicated funds to other economies," added Nishith Desai Associates. However, unless it is clear how much of investment is due to round-tripping, it is impossible to say whether the new rules would be a hindrance. After all, a lot of genuine long-term investors don’t use the PCC or SPC structure.
Any ruling that advocates trail commissions or a ban on ULIPs will be significantly negative for the sector, the brokerage has said
ICICI Securities Ltd, a unit of ICICI Bank Ltd, has said that it believes the 'status quo' in the ongoing conflict between the insurance and stock market regulators will be difficult to maintain in light of the finance minister’s comment on the phasing out of the current ‘front load’ structure in the life insurance space.
"Such a structure, if implemented, will be significantly negative for the industry. The implementation would lead to sharp decline in sales and persistency in the short term, pressurise margins and have negative impact on valuations," ICICI Securities said in a research report.
On 10th April, market regulator Securities and Exchange Board of India (SEBI) banned 14 life insurance companies from raising funds through unit-linked insurance plans (ULIPs), without an approval from its side. Later on 14th April, SEBI came out with a second order that exempted the existing ULIP schemes of these 14 players from the ban. Yesterday, the market watchdog had moved the Supreme Court and some High Courts to guard against any ex-parte decision.
ICICI Securities said that valuations of life insurance entities will suffer significantly if either the products become ‘no-load’ or the SEBI stance on regulation of ULIPs is implemented, and it awaits further clarity on the issue and keep its estimates unchanged.
Given the already high capital infusions, dependence of about 30 lakh agents on commissions and high proportion of ULIPs in sales, the brokerage said that it believes it will be difficult to implement a ‘no-load’ structure. Any ruling that advocates trail commissions or a ban on ULIPs will be significantly negative for the sector, ICICI Securities added.
The brokerage said that within its insurance coverage universe, Aditya Birla Nuvo, Reliance Capital and Bajaj FinServ will be most impacted as the life insurance business accounts for a significant proportion of their valuations while the impact on SBI and HDFC will be limited as insurance contributes to a smaller proportion of their valuations.
Various banks and insurance companies are showing growing interest in the new revised reverse mortgage product, based on the bank- insurance company tie-up model
Banks like Punjab National Bank, Corporation Bank, Union Bank and Bank of India and insurance companies like the Life Insurance Corporation of India (LIC) and Reliance Life Insurance—among other companies—are showing interest in the reverse mortgage segment. This in turn would prove to be a boon for senior citizens.
Recently, the National Housing Bank (NHB) had announced a revised reverse mortgage scheme based on a bank-insurance company tie-up model. This new revised scheme would be beneficial both for senior citizens and the bank.
According to well-placed sources, most public sector banks have shown interest in this new model. However, not much has been heard from private sector banks on this segment.
“Banks are looking at tie-ups with Star Union Dai-ichi and also at other options of tie-ups with other insurance companies,” said a source, on the basis of anonymity. It is also likely that these banks may come up with different variants of the product based on the ‘bank-insurance’ company concept.
The first reverse mortgage product was introduced in May 2007, followed by a new scheme from NHB in 2009. The first product on the basis of the new revised model is being offered by Central Bank of India along with Star Union Dai-ichi.
The new model, (see here), not only offers better returns compared to the first version introduced in 2007, it also makes the product viable for banks. Earlier, banks had to bear 100% of the risks involved in the product. But with the new product, the risks are divided between the insurance company and the bank. Typically, the bank bears an ‘over-valued property’ risk, while the insurance company would bear the longevity risk (if the senior citizen lives exceptionally longer). This could be one of the main reasons for the growing interest from banks in the revised model.
Given the fact that the revised model offers lifetime annuity payments, growing competition in this segment will help senior citizens enjoy the best value for their homes.