SEBI Backtracks on FPI Rules, To Allow NRIs and PIOs To Hold Non-controlling Stake
After facing a backlash from foreign funds' lobby group, market regulator Securities and Exchange Board (SEBI) has radically changed its course on banning non-resident Indians (NRIs) and persons of Indian origin (PIOs) from owning foreign portfolio investment (FPI) vehicle or structure. SEBI may allow NRIs and PIOs to hold 25% as a single beneficiary and up to 50% as a group in an FPI.
In April this year, SEBI had banned NRIs and PIOs from being beneficial owners (BOs) of an FPI, giving them six months to make the changes.
The HR Khan Committee suggestions were made in response to the strong objections raised by the Asset Management Roundtable of Indian (AMRI) to the SEBI circular issued on 10 April 2018 which effectively placed a blanket ban on investments through certain FPIs.
On Saturday, the Khan Committee recommended some changes in the norms in know-your-customer (KYC) guidelines for NRI and PIOs. The Committee was set up by SEBI to review the FPI rules. The Committee met last week against the backdrop of a sharp fall in market indices. The market was supposedly rattled by the new rules that would be applicable to the FPIs from December, forcing them to liquidate their investments in India.
Commenting on the interim recommendations of the Khan Committee, Mohit Kapoor, founding partner, Universal Legal, says, “The restrictions imposed on FPI's managed by NRI OCI, RI and PIO's is based on unwarranted concerns by SEBI that many of these FPI's indulge in money laundering. Instead of imposing such stringent conditions on all FPI's and harming the investor sentiment, it would prudent for the regulator to strengthen its enforcement mechanism and take action against those who have contravened the existing rules.”
The circular issued on 10 April 2018 had said that NRIs, PIOs and overseas vehicles set up by Indian financial services groups cannot be 'beneficial owners' of FPIs. Under the Prevention of Money Laundering Act (PMLA) and the related rules, beneficial ownership means 25% ownership in a company or 15% in a trust or partnership.
All existing FPIs whose clubbed investment in equity shares of a company is in breach of the provisions of Regulation 21(7) of SEBI (Foreign Portfolio Investors) Regulations, 2014 were required to ensure compliance within six months from the date of the circular. SEBI had given market players six months to adhere to the new rules, which would have got over by 10th September. On 21st August, SEBI extended that date till 31 December 2018.
Alarmed by this, on 3rd September, a lobby of institutional investors and a top law firm advising it openly criticised the SEBI circular, describing the new rules as ‘racial discrimination’ that could lead to a sell off in stocks. It said that the SEBI "circular is vague, opaque, and confusing. It distrusts NRIs and resident institutional community… A Nigerian can manage an FPI but not an NRI or a large Indian group," said Nandita Agarwal Parker, president of AMRI, an association of FPIs.
AMRI and Nishith Desai, founder of law firm Nishith Desai Associates, jointly addressed the media on Monday. “We understand the government's concern over round-tripping. FPIs have no objection in disclosing who the beneficial owners are. But why restrict investments?” asked Mr Desai at the press conference.
Last week, a report from Times of India mentioned that the SEBI has taken ‘a strong exception’ to the contention as much as $75 billion will flow out of India due to changes regulations governing FPI, warning that market participants cannot threaten SEBI. Of the $450 billion investments by FPIs, $75 billion is estimated to be managed by NRIs, OCIs, PIOs and regulated resident institutions and individuals. However, SEBI has now effectively backtracked on its policy.
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