SEBI moves proposal to enhance Indian diaspora involvement in FPIs

To implement this, NRIs and OCIs identified as beneficial owners of the FPI must furnish detailed information about entities holding ownership, economic interest, or control within the FPI

The Securities and Exchange Board of India (SEBI) has unveiled a proposal to enhance the involvement of Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in Foreign Portfolio Investors (FPIs) based in the International Financial Services Centres (IFSCs) within the country. This move, outlined in a consultation paper released on August 25th, aims to enable NRIs and OCIs to contribute 50% or more to the FPI’s capital pool.

To implement this, NRIs and OCIs identified as beneficial owners of the FPI must furnish detailed information about entities holding ownership, economic interest, or control within the FPI. This disclosure becomes mandatory if the FPI holds over 33% of its Indian equity AUM within a single Indian corporate group or if, together with its investor group, it holds a cumulative equity AUM exceeding INR 25,000 crore in the Indian market. Contributions from a single NRI, OCI, or resident Indian are limited to below 25% of the total capital in the applicant’s corpus.

For proper identification, NRIs and OCIs acting as beneficial owners must provide their passport number and OCI number, respectively, to designated depository participants. SEBI emphasizes that the IFSC Authority (IFSCA) possesses a more efficient information-sharing mechanism with SEBI compared to other international regulatory bodies, making it better suited to supervise structures predominantly owned by NRIs and OCIs.

Yashesh Ashar, a partner at Illume Advisory, believes that relaxing NRI and OCI investment restrictions in FPIs within IFSCs would bolster GIFT IFSC’s position as an offshore financial jurisdiction. He suggests extending this relaxation to resident individuals investing in alternative investment funds operating out of IFSCs and investing within India.

Caution is urged regarding potential risks arising from increased NRI and OCI contributions, including concerns about money laundering, circular trading practices, and potential violations of minimum public shareholding and takeover regulations. Despite these challenges, the consultation paper recognizes the potential for additional investments in the Indian securities markets by channeling funds through professionally managed FPIs.

While acknowledging concerns about market manipulation outlined in the Joint Committee Report (JPC) on the stock market scam in 2002, the consultation paper recognizes that these concerns persist due to the potential proximity of individuals of Indian origin with Indian companies and promoters.

There is a growing demand to streamline NRI and OCI investments into Indian markets through the FPI route. The current option of utilizing the Portfolio Investment Scheme (PIS) route has limitations on investments through overseas pooled structures. Existing constraints on NRI and OCI contributions to the FPI capital result in added compliance complexities and costs, such as compelled redemption or arranging fresh investments from non-NRI/OCI sources in response to redemption requests from non-NRI/OCI investors.

However, caution is urged regarding potential risks arising from increased NRI and OCI contributions, including concerns about money laundering, circular trading practices, and potential violations of minimum public shareholding and takeover regulations. Despite these challenges, the consultation paper recognizes the potential for additional investments in the Indian securities markets by channeling funds through professionally managed FPIs.

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