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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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. 
 
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COMMENTS

Saravanan R

2 months ago

Yes. Why these FPIs wait till the circular takes effect ? They were deliberately waiting for the issue to gain force as a tempest. So that Govt or SEBI can be tempered or cowed down to withdraw the circular. Congress Govt had always handled issues like this way to arm-twist the investors and then "accede" to their request ('threat'). Now industry and investors try the same trick.

Shifting to SDRs would unshackle global central banks of forex woes
It is no secret that the international monetary system is not perfect. The capital flow dynamics over the last decade stands testimony to this.
 
In response to the economic crisis of 2008, the US Federal Reserve began practicing an unconventional form of monetary policy known as quantitative easing, where the government increases money supply in the economy to stimulate the level of spending and investment. In the process, the interest rates in the economy begin to approach zero. When the US carried on with this policy for a number of years following the crisis, the dollar left the country for economies that could provide higher returns. 
 
As the Fed gave the first signs of winding down its policy of quantitative easing in 2013, the developing economies took a serious hit as US dollars began to be withdrawn. India was one of the worst affected economies due to its precarious macro-economic fundamentals at the time and found itself in the company of the 'fragile five' emerging markets - along with Brazil, South Africa, Indonesia and Turkey. By the time the Fed actually began tightening its monetary policy, India had built mechanisms to counter the capital flow out of its economy. 
 
But, this year was different. The vulnerable third world economies have expectedly been adversely affected by the large-scale outflow of US dollars. But, the world's major economies have also been slowing down. In fact, America is the only G7 nation that is expected to grow faster this year than the last. The impending trade war fears surely have had a role to play, but the primary cause of the slowdown has been a strengthening dollar. The dependency of the global economic order on the whims and fancies of the US central bank is certainly a concerning aspect of the international monetary order. A fundamental reform is in order. 
 
The problem lies with the US dollar being the world's primary reserve currency. It is, therefore, used to settle international transactions. If India has to import oil from Iraq, the transaction is not done using the Indian rupee or the Iraqi diner, but in US dollars. The use of the American dollar as the prime intermediary currency becomes problematic because other countries have no say in the policy choices that affect it.
 
The world is practically functioning like the Eurozone with all its flaws. The rude reality of the European monetary union is that the countries which are a part of it run independent domestic fiscal policies but have no say in the monetary policy. The latter is run by the Eurozone's central financial authorities, where Germany plays a dominant role. The other countries have to merely accept whatever happens with the euro; exactly like how the world economies have to take the trends of the US dollar as given. 
 
The dominance of the US dollar has its origins in the Bretton Woods system adopted after the Second World War. At the time, John Meynard Keynes had proposed a global currency, known as Bancor, but the idea never caught on. The closest alternative to the US dollar is the "special drawing rights" (SDRs) issued by the IMF, which is an aggregation of the five major currencies of the world. The largest such issue came in response of the 2008 crisis in response to the collapse of the international private lending system. A push for wider acceptance of the SDR can be a possible way forward to reduce the global vulnerability towards the dollar. 
 
A game theoretic approach shows that it is beneficial for the world to use SDR as the global currency. If the home country and the rest of the world are taken as two players in the model, they will have two choices of using the SDR as the global currency or maintaining a status quo. A quick back-of-the-envelope calculation shows that the Nash equilibrium of the game will lie in a situation where both parties transact in SDRs (where the payoffs in both parties choosing SDR is assumed to be 1 and maintaining status quo is 0 as there exists less exchange rate volatility in the former case while choosing a contradictory strategy results in a negative payoff for the home country as it loses out on trade).
 
It behoves upon an influential body of international cooperation like the G20 to push forward the agenda of a more stable financial order. A higher use of SDRs to finance lending by the IMF is a possible measure to increase its usage and acceptance. The success of such a shift would free the global central banks from accumulating foreign reserves and allow for more independence in their monetary policy goals. Most importantly, it will ensure greater stability and faster sustained growth in the world economy.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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COMMENTS

Meenal Mamdani

3 months ago

The US will never allow that without a major fight, perhaps a global war.

That is why it maintains such a huge armed force, way beyond its immediate needs. Partly it is to feed the always hungry military-industrial complex but also partly to maintain its domination in the world of finance.

I think Trump has given a major boost to the idea of SDRs becoming the transaction of choice. Until now American policy could be anticipated as it was usually possible to determine which way it would tilt. But Trump's utter contempt for world stability and the opinions of America's allies, EU and others are looking for ways to reduce their dependence on the dollar.

May be something good will come out of the fiasco that is Trump.

REPLY

Balakumar Paramasivam

In Reply to Meenal Mamdani 2 months ago

Gold is the best option for the Central Banks as SDRs will make mainstream only after a collapse of the Global Monetary system or a surprise withdrawal of US from IMF. No surprises that Russia is continuously dumping the dollar and steadily building its Gold Reserves. The Russian Central banker Elvira Nabiullina is a prudent women and she has strategically buying Gold ever since she become Central banker in 2013. To fully break the US Dollar hegemony, the Saudis and Qatari's should be dumping the Petro/Gas dollars and it is unlikely to happen(with the Centcom forces stationed in Qatar). The assessment about Trump is rather harsh. The so called American allies are run by governments who have no regard to their Citizens and have remained drum beaters for Warmongering attitude of the US under the cover of Anti terrorism/ Restoring Democracy.

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