It’s stipulated that the contribution from a single NRI, OCI, or resident Indian will be limited to below 25% of the total capital contribution in the applicant’s corpus
The Securities and Exchange Board of India (SEBI) has recently introduced a consultation paper on August 25th, with the objective of facilitating increased participation from Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) in foreign portfolio investors (FPIs) that are located within the confines of International Financial Services Centres (IFSCs) in India. The proposal, as reported by thehindubusinessline.com, suggests permitting NRIs and OCIs to contribute 50% or more to the FPI’s capital pool.
To realize this, NRIs and OCIs who are identified as beneficial owners of the FPI will be required to provide detailed information about all entities that possess any form of ownership, economic interest, or control within the FPI. This disclosure becomes mandatory if the FPI holds more than 33% of its Indian equity AUM within a single Indian corporate group, or if, along with its investor group, it holds a cumulative equity AUM exceeding INR 25,000 crore in the Indian market.
It’s stipulated that the contribution from a single NRI, OCI, or resident Indian will be limited to below 25% of the total capital contribution in the applicant’s corpus.
For proper identification, NRIs and OCIs acting as beneficial owners of the FPI must provide their passport number and OCI number, respectively, to their designated depository participants.
SEBI highlights that the IFSC Authority (IFSCA) possesses a more efficient information-sharing mechanism with SEBI in comparison to other international regulatory bodies. Consequently, IFSCA would be better positioned to supervise structures predominantly owned by NRIs and OCIs.
Yashesh Ashar, a partner at Illume Advisory, expressed that the relaxation of NRI and OCI investment restrictions in FPIs within IFSCs would significantly bolster the position of GIFT IFSC as an offshore financial jurisdiction. He also suggested extending this relaxation to resident individuals investing in alternative investment funds operating out of IFSCs and investing within India.
The paper acknowledges that the concerns regarding market manipulation, which were outlined in the Joint Committee Report (JPC) on the stock market scam back in 2002, still persist today due to the possible proximity of individuals of Indian origin with Indian companies and promoters
There has been an escalating demand for channeling NRI and OCI investments more effectively into the Indian markets through the FPI route. Although these entities currently have the option of utilizing the Portfolio Investment Scheme (PIS) route, it comes with limitations on investments through overseas pooled structures.
The existing constraints on NRI and OCI contributions to the FPI capital create added compliance complexities and costs for the FPI. An instance would be a redemption request from non-NRI/OCI investors, which could potentially alter the percentage contribution of NRIs and OCIs in the FPI corpus, necessitating unwelcome scenarios such as compelled redemption or arranging for fresh investments from non-NRI/OCI sources.
Nevertheless, it’s essential to remain cautious about the potential risks that might arise from elevated NRI and OCI contributions. These encompass concerns about money laundering, circular trading practices, and potential violations of minimum public shareholding and takeover regulations.
The consultation paper acknowledges that the concerns regarding market manipulation, which were outlined in the Joint Committee Report (JPC) on the stock market scam back in 2002, still persist today due to the possible proximity of individuals of Indian origin with Indian companies and promoters.
However, the paper also recognizes the potential for further investments in the Indian securities markets by channeling funds through professionally managed FPIs.
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