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Why SEBI new norms spooked FPIs

The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai, India March 1, 2017. REUTERS/Shailesh Andrade - RTS10YF8

The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai, India March 1, 2017. REUTERS/Shailesh Andrade - RTS10YF8

Why did SEBI’s new norms spook FPIs

Last week, an association of foreign funds, Asset Managers’ Roundtable of India, warned of a potential outflow of $75 billion from the Indian equity markets over a circular issued by the Securities and Exchange Board of India (SEBI) in April.

On April 10, SEBI issued a circular for enhancing the KYC (know-your-customer) norms for Foreign Portfolio Investors (FPIs) and asked category-II and III FPIs to provide a list of their beneficial owners (BOs). The deadline for submission has been extended to December 31, 2018.

What does the circular say?

It says Resident Indians (RIs), Non Resident Indians(NRIs), Persons of Indian Origin(PIOs) and Overseas Citizens of India(OICs) cannot be beneficial owner of a fund investing in India. Nominee is not considered as a BO of FPI.

A beneficial owner (BO) is one, who, directly or indirectly, derives the benefits of ownership.

The threshold for a BO in a partnership firm or trust is 15% and 25% in the case of companies. The threshold is further reduced to 10% if the fund is incorporated in a high-risk nations with a history of money-laundering and terrorism, etc.

In case no single entity meets these thresholds, then a senior managing official of the FPI is the designated BO.

NRIs and OCIs can only obtain an FPI licence on condition that they limit their roles to investment advisors and do not invest their money. The regulator had asked Category II and III FPIs to disclose the name and address of the BOs, their tax residency jurisdiction along with percentage shareholding capital or profit ownership in the FPIs.

Category II FPIs largely include regulated institutions, persons, broad-based funds and university, pension and endowment funds.

Any single FPI can hold a shareholding limited to 10% in an Indian listed company. If the limit is breached, the BO must either opt to be treated as a Foreign Direct Investor, or divest stake below 10% within five trading sessions of the breach of limit. The order comes into effect by December.

Why FPIs important ?

FPIs have been major investors in the Indian stock market.

What can FPIs do?

Foreign funds with majority holding of NRIs, PIOs, OCIs and RIs will look for alternative structures, to avoid beneficial ownership breach, or unwind their positions.

What was SEBI’s motive?

Though the regulator has not explicitly stated the reason, concerns over money-laundering and round tripping may have prompted this directive.

Why are FPIs unhappy?

FPIs are currently allowed to invest up to 10% in a listed Indian company. SEBI has now said that their investment limit will be clubbed if they have the same BO.

Secondly, as of now, economic ownership has been the basic criteria for determining the BO of an offshore fund. This mean an entity owning a majority stake in a fund is considered a BO. But in new circular, the regulator asked FPIs to determine ownership based on both shareholding and control.

In this context, control means the right to appoint and remove directors, along with other administrative rights. India-origin fund managers don’t own any controlling stakes in the funds they run but are in control. Hence, the structure becomes impermissible in accordance with the new circular.

Thirdly, SEBI has said that high-risk nations would be subject to more rigorous KYC norms.

India-based investment managers have been affected since they can no longer be beneficial owners of FPIs. Many investment managers, based in India, set up offshore funds to attract NRI money, control them and invest some of their own funds.

In a relief to FPIs, SEBI-appointed panel on Saturday has made some suggestions to the earlier circular.

What has the panel suggested?

The SEBI-appointed panel has made key suggestions. (i) NRIs, OCIs and RIs be allowed to manage foreign funds that invest in India subject to certain holding limits. (ii) A single NRI, OCI or RI cannot hold more than 25% of the assets under management of the FPI and the aggregate holding of such entities has to be below 50% in the foreign portfolio investment. (iii) Changes have been suggested regarding identification of senior managing officials of FPIs and for beneficial owners of listed entities. (iv) Centre has told SEBI that it need not use beneficial owner definition laid down under PMLA.(v) SEBI asked to consult Centre to evolve a more objective criteria for defining high-risk jurisdictions.

SEBI has given time till September 17 for public comments on the panel recommendations.

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Printable version | Jun 30, 2022 7:58:10 pm | https://www.thehindu.com/business/Economy/why-sebi-new-norms-spooked-fpis/article24909358.ece