HR Khan Committee Meets To Discuss FPIs’ Contention of a Possible US$ 75 Billion Outflow
While a Times of India report mentioned on Wednesday that the Securities and Exchange Board (SEBI) has taken ‘a strong exception’ to the contention as much as $75 billion will flow out of India due to changes regulations governing foreign portfolio investors (FPI), the HR Khan Committee set up by SEBI to review the FPI rules, met against the backdrop of a sharp fall in market indices of the last few days. 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.
A group of non-resident Indians (NRIs) and offshore investment vehicles of financial services firms based in India had addressed the media a few days ago warning that as much as $75 billion worth of investments may be withdrawn from India by December 2018 if SEBI did not modify a circular that put restrictions on NRIs and people of Indian origin (PIOs) from investing via the FPI route.
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.
Hence, the FPIs were required to provide the list of beneficial owners (BO), in a format prescribed, within six months from 10 April 2018. It also said that the existing FPI structures not in conformity with the requirement were required to change their structure or close their existing position in Indian securities market within six months from the date of the circular.
The existing FPIs or their investors identified on basis of threshold for identification of BO in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, who do not conform to the requirements were required to ensure compliance within six months of the date of the circular.
All existing FPIs whose clubbed investment in equity shares of a company is in breach of the provisions of Regulation 21(7) of Securities and Exchange Board of India (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 Asset Managers Roundtable of India (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.
“Is it right to think that the entire NRI community is facilitating money laundering? Who markets the India story to foreign investors? It is the NRIs and Indian institutions,” he argued. “An immediate impact of the circular (if not amended) is that from 31 December 2018, about $75 billion investment managed by overseas citizens of India (OCIs), PIOs, NRIs and resident institutions (RIs), will be disqualified from investing into India and will have to be withdrawn and liquidated within a short time frame, thereby affecting the Indian markets and the Indian currency,” said an AMRI letter dated 29th August to SEBI Chairman Ajay Tyagi, copies of which were addressed to the Prime Minister and finance minister.
Of the $450 billion investments by FPIs, $75 billion is estimated to be managed by NRIs, OCIs, PIOs and regulated resident institutions and individuals.
“Unfortunately, the circular was issued without any prior consultation with the stakeholders, who were not able to raise these concerns to the regulator before the circular became applicable,” AMRI said in its letter, adding that the circular, which was meant to enhance know-your-customer (KYC) norms, has placed a blanket ban on investments through certain FPIs.
The Times of India article had quoted anonymous SEBI officials as saying that it would “not be threatened by strong-arm tactics being employed by this group which has created a panic-like situation in the market. It is preposterous and highly irresponsible to claim that $75 billion of FPI investment will move out of the country because of SEBI circular issued in April 2018” reported the newspaper.