Sebi to Make Life Easier for FPIs; to Look at Grey Areas, Rework Rules
MARKET REGULATOR FORMS PANEL to rationalise investment norms for offshore funds to trade in India
The regulations for foreign portfolio investors (FPIs) — the dominant club in the country’s capital market — will be recast to make it easier for these offshore funds to trade in India.Capital market regulator Sebi has constituted a high-profile team led by a former deputy governor of Reserve Bank of India (RBI) to redraft the rules.
The committee will delve into multiple grey zones and ambiguities to come out with a new policy regime without altering the broader framework. Some of the areas that could be examined are: a possible relook at rules for foreign institutional investors, which are otherwise registered with in matured jurisdictions like the US, but pool their money in a tax haven like Cayman Islands; should FPIs be given more time to make their funds broad-based — which require a minimum number of 20 investors; should key persons of funds, which are perceived as high-risk in nature, be asked be share their personal details; and most importantly, bridging the gaps between hundreds of FAQs (frequently asked questions) released by Sebi at various points and the actual regulations.
“For instance, a large fund which may be registered with the US labour department or some other Federal authority but not the US Securities & Exchange Commission would be considered by Sebi as Category III fund under the present rules. Now once an FPI is in the CAT III list, key people in the fund have to share copies of their passports, financial statements and incorporation documents. Many are not comfortable with this due to privacy concerns and fear of data theft. Such rules may also apply to FPIs which are registered with one of the state authorities,” a person familiar with the development told ET. Officials or directors of other funds (included under Category I and II) have to furnish only selfdeclarations.
FPIs are classified into three categories. Category I (or CAT I) FPIs are sovereign funds and those backed by government and multilateral agencies; CAT II FPIs are regulated, broad-based entities like pension funds, and funds led by insurance companies, banks and mutual funds; and, CAT III FPIs are ‘unregulated’ funds backed by corporates, individuals, family offices, and trusts; hedge funds, which are under a comparatively looser regulatory regime, are also included under CAT III.
“Category II FPIs are required to broad base their funds within three to six months. Many funds find this challenging. May be the committee can look to give them at least a year,” said a senior broker. “Custodians as well as FPI managers often interpret rules differently due to differences between the FAQ and Sebi circulars. Large custodians prefer a more conservative stand due to compliance reasons,” he said.
The newly-formed panel, headed by former RBI deputy governor Harun Rashid Khan, had its first meeting last week. “While the broad agenda is to rationalise rules to make them easier for foreign investors, it was made clear that Sebi will not relax the recently announced restrictions on NRIs investing through FIIs or acting as fund managers of overseas funds. Sebi has made it very clear that this rule is being directed by New Delhi,” said another person.
According to this rule — which many feel has been imposed to curb round-tripping and inflow of funds in the run-up to the crucial 2019 elections — NRIs cannot be ‘beneficial owners’ (BO) of FPIs.BO would mean 25% ownership in a company or 15% in a trust or partnership — depending on how an FPI is structured; second, the BO rule would be triggered if the manager of such a fund is an NRI even though the person may not have any investment in the fund; and third, the threshold (for establishing NRI control or dominance in the fund pool) would be at a lower (and thus more stringent) level of 10% if the FPI is based in a high-risk jurisdiction.
Sebi to Make it Easier for FPIs
Moreover, the recent restrictions on FPI debt investments prescribed by RBI in consultation with Sebi, have to an extent disrupted the FPI inflows in Indian corporate debt securities, said Tejesh Chitlangi, senior partner at the law firm IC Universal Legal. “Prescription of stringent group exposure norms coupled with the prohibition on majority participation in a single issuance has the potential to disrupt several genuine foreign debt investments in India.
This will lead to unintended consequences and the concerns need to be addressed soon by prescribing norms which are feasible and do not suddenly overturn earlier regulatory policies,” said Chitlangi.Officials of large MNC banks (which act as custodians to the FPIs), senior consultants, and partners of leading law firms are some of the other members of the Khan committee.
The Economic Times, New Delhi, 14th May 2018