Avoidable suspense

Avoidable suspense

News

1. SEBI board will meet to give final shape to FPI regulations.

Important Facts

2. Total portfolio investment in Indian Market is estimated at $450 billion.

3. Asset Managers Roundtable of India  (AMRI) warned that SEBI circular disqualifies $75 billion of portfolio investment.

Background

4. On April 10th, SEBI in a circular issued new structural guidelines for FPIs of certain category.

5. The FPI norms have been in the news in the recent past with overseas investors objecting to the circular issued in April.

6. SEBI asked a working group headed by H.R. Khan to look into the concerns expressed by FPIs and give suggestion.

7. SEBI has put out the Panel’s recommendation for public opinion.

Analysis of Circular

8. The Circular issued to enhance Know Your Client Norms ended up imposing a blanket ban on certain types of investments where NRIs, PIOs or OCIs were investors.

9. Critics argued that the circular disallowed NRI and OCI from managing investment on behalf of foreign investor but the circular was

• In accordance to FPI regulation in 2014.
• SEBI never had an objection to NRIs and RIs managing FPIs, provided they did not invest their own fund through them.
• ‘The only restriction was that a significant part of the investment could not be proprietary fund because that would make the investment managers as Beneficial Owners(BO)

10. Circular laid down that NRIs and OCIs cannot be beneficial owners in FPI else they have to be liquidated.

• Allowing these investors to hold substantial stakes in FPIs would be akin to allowing them a back door entry in to Indian Market.

11.   Ceiling to invest in a stock

• FPI: 24% of paid up capital.
• NRI: 10% of paid up capital.

12. Primary intention of the circular was to identify a natural person as the owner of each FPI such that round tripping could be curbed.

13. The circular tried to pin the Beneficial Owner of each FPI by rule laid down in Prevention of Money Laundering Act (PMLA).

14.   Who are beneficial owners?

• 25 % FPI if investor is a company.
• 15% if investor is a partnership firm, trust or person.

HR Khan Committee Recommendations

15.   Acknowledged that using PMLA for identifying BO is not right.

• Recommended that the threshold for identifying BO can be 25% of the Asset under Management (AUM) in case of a single NRI/OCI/RI.
• AUM of entities should be below 50%.
• In case these entities hold more than the prescribed limit, they have to liquidate the portion of assets exceeding the limit or transfer it to someone else.

16. The committee recommended for the extension of the deadline for complying with the circular. It also recommended a 180 day window if the investor breaches the threshold fund.

Conclusion

17. Attempts to curb Round-tripping is important but treating all FPIs with Indian origin managers as potential conduit of illicit money is unwise.
18.   This could have been avoided if SEBI had dialogue with the stakeholders.
19.   Policy uncertainty and sharp about turns should be avoided as it dents India’s credibility among global investors.