After NRI investments in domestic market, foreign funds on Sebi radar

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After NRI investments in domestic market, foreign funds on Sebi radar

Regulator asks custodians to provide end-beneficiary data of foreign funds with Indian ownership




A fortnight after the market regulator tightened rules around non-resident Indian (NRI) investments in the domestic market, several foreign funds have come under the scrutiny of the Securities and Exchange Board of India (Sebi)

According to sources, the regulator has sought investment and end-beneficiary-related information of foreign portfolio investors (FPIs) from their custodians. Sebi wants to crack down on those NRI-managed funds that are also used to channel money belonging to persons of Indian origin (PIO)




Sebi’s FPI regulations prohibit any foreign fund from being controlled by a PIO or NRI. Such entities are allowed to obtain an FPI licence on condition that they act only as investment advisors and do not invest their money.

However, global funds typically ask fund managers to put up some seed capital, called skin-in-the-game in industry parlance. In order to meet this obligation and to avoid regulatory scrutiny, several NRI fund managers have infused seed capital through innovative structures like limited liability partnerships (LLPs).

Therefore, the end-beneficiaries of these LLPs are either the fund managers themselves or their immediate families. Until now, Sebi has been lenient with such practices. However, concerns on round-tripping and misuse of such structures have prompted the regulator to take a harsh stand, sparking concerns among fund managers with Indian connections.




Most of these funds belong to jurisdictions such as Mauritius, Cayman Islands, and Luxembourg, which are known for light domestic laws. Since most of these funds are incorporated in these countries, they attract minimum compliance.

“Several Indians have been misusing the FPI route even though the regulations have been clear from the beginning. Since these funds are already regulated in their home countries, Sebi so far has had a hands-off approach. However, the regulator now seems to have turned the heat on them,” said a source. In several jurisdictions, any entity starting a fund is required to put part of its own money. For instance, in Singapore a fund manager has to invest Rs 240,000 as seed capital.

“Concepts like seed money or general partner contribution are very common while setting up funds, as a fund manager should have his skin in the game.However, if any PIO makes such an investment, it is in direct violation of FPI rules,” said Tejesh Chitlangi, partner, IC Universal Legal




In a circular dated April 11, Sebi reduced the cap on NRI investments through theFPI route. Under the FPI norms, an NRI cannot be a beneficial owner of a foreign fund. Further, the market regulator also tweaked the definition of beneficial owner. Under the new rules, a person of Indian origin cannot own more than 15 per cent in a fund if it is a partnership and 25 per cent if structured as a company.

Round-tripping roadblocks




1.Sebi has sought investment and end-beneficiary-related information of some foreign portfolio investors (FPIs) from their custodians
2.The funds under scrutiny are managed by NRIs or persons of Indian origin (PIO)
3.According to Sebi rules, a PIO can act as investment manager of a foreign fund and is not allowed to put in his own money
4.However, lot of these fund managers have invested what is known as seed capital while starting the funds
5.These investments are in direct violation of Sebi rules
6.The decision was taken by Sebi, keeping in mind the concerns about round-tripping of money through foreign jurisdictions

The threshold is 10 per cent if the fund is incorporated in a high-risk jurisdiction notified by Financial Action Task Force. Before the tweaks, the cap was 51 per cent of the total investment corpus. Legal experts say getting information of actual owners of funds investing in the country is not a big challenge for Sebi.

“Sebi has access to all the information related to trades of FPIs. It also has access to ownership information through quarterly filings by these overseas funds. When it comes to information about end-beneficiaries, Sebi has several memorandums of understandings with foreign regulators, hence accessing information should not be an issue,” said Anil Choudhary, partner, Finsec Law Advisors.




In the past, a Supreme Courtappointed special investigation team on black money had expressed concerns over use of participatory notes and misuse of the stock exchange platform for round-tripping. This prompted Sebi to tighten the noose around foreign flows. The latest move by Sebi is also seen as a step in that direction.

The Business Standard, New Delhi, 01st May 2018

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