The current FPI regulations issued by SEBI states that NRIs or OCIs or RIs may be constituents of the FPI, however, the contribution of a single NRI or OCI or RI shall be below 25% of the total contribution in the corpus of the FPI and the aggregate contribution of NRIs, OCIs and RIs shall be below 50% of the total contribution in the corpus of the FPI.
Over the years, there has been a constant demand for channelling more NRI/ OCI/ RI investments in the Indian securities markets by facilitating greater participation of NRIs/ OCIs/ RIs in the corpus of the FPIs. The Hon’ble Finance Minister had also acknowledged in the budget speech in July 2019 that even though India is the world’s top remittance recipient, NRI investment in Indian capital markets is comparatively less.
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NRIs/ OCIs can currently invest directly in India through the Portfolio Investment Scheme (PIS) route. However, the PIS route restricts NRIs from investing in India through overseas pooled structures managed by professional managers, thereby depriving them of the benefit of investment management by professionals.
Of late, SEBI had received requests from IFSCA to permit greater participation of NRIs/ OCIs in IFSC based funds that invest in the Indian securities markets through the FPI route.
The reservations on allowing access to the securities markets to NRIs/ OCIs through Overseas Corporate Bodies (OCBs) (entities owned directly or indirectly at least 60% by NRIs/ OCIs) have been linked to the stock market scam of 2001, due to their close proximity with Indian entities/ promoters of Indian entities. Some Indian promoters were suspected to have been using these OCBs as their fronts. Also, there was difficulty in gathering information about the ultimate beneficiaries of such OCBs. Given the risk associated with OCBs, the same was withdrawn in 2003.
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While SEBI is still wary of allowing NRIs/ OCIs/ or RIs to be constituents of FPIs as it perceives the above risks to exist today as well, IFSCA has stated that the risks associated with NRI/ OCI/ RIs owned entities trading in the Indian securities markets through the FPI route may be suitably addressed in case of funds based out of IFSC, as IFSCA, which is, in essence, an Indian regulator, shall regulate such funds.
IFSCA had, therefore, suggested that under the supervision of an Indian regulator, administered under the laws of the land, the investment vehicles in IFSC may be liberalised from the NRI/ OCI participation limits and placed as a regulated and optimal avenue for channelling NRI/ OCI investments into India.
In light of the above, in August 2023, SEBI had released a consultation paper to invite comments for various stakeholders.
After detailed deliberations with various stakeholders including IFSCA, on 30 April 2024, the SEBI Board has approved 100% contribution by NRIs, OCIs, RIs in the corpus of the FPIs based out of IFSC in India, regulated by IFSCA. Notification in this regard is yet to be issued by SEBI.
On 2 May 2024, IFSCA has issued a circular (which is effective immediately) summarising the SEBI Board’s decision for increased participation by NRIs and OCIs in Indian securities through IFSC based FPIs under 2 alternative routes as under:
Alternative route 1: NRI/ OCI/ RIs investors may contribute up to 100% in the corpus of IFSC based FPIs where such FPIs will be, inter alia, required to submit copies of Permanent Account Number (PAN) (or other suitable documents in the absence of the same), of all their NRI/ OCI/ RI individual constituents, along with their economic interests in the FPI, to the DDP. The modalities for this alternative shall be specified by SEBI.
Alternative route 2: NRI/ OCI/ RI investors may contribute up to 100% in the corpus of IFSC based FPIs without the FPI being required to submit the above-mentioned documents, provided it satisfies certain conditions.
Some of these key conditions are; the fund management entity shall independently take investment decisions without being influenced by the investors in the FPI; such FPI shall be restricted from co-investments; the FPI shall have at least 20 investors with no single investor accounting for more than 25% of the corpus of the FPI; the FPI shall not invest more than 20% of its assets under management in the securities of a single investee company; the investment manager of the FPI is an Asset Management Company of a SEBI registered Mutual Fund which is sponsored by a RBI regulated Bank or its IFSC based subsidiary/ branch.
In August 2023, SEBI mandated FPIs to provide granular details of all constituents of the FPI, on a full look through basis, up to the level of all natural persons, without any threshold, subject to certain exemptions. Similar criteria for disclosure of granular details have also been laid down for FPIs based in IFSC.
There is a merit in the relaxation provided for NRIs/ OCIs/ RIs being part of FPIs based in IFSC as the same should boost the already bullish Indian capital markets. The FPI in IFSC would be required to obtain a fund management registration and a Cat III AIF licence as well. Currently, the Indian income-tax laws exempt non-resident investors (including NRIs/ OCIs) of Cat III AIFs from obtaining a PAN, subject to certain conditions. However, the same is inconsistent as PAN would now be required (under alternative 1 mentioned above) going forward as mentioned by SEBI for NRIs/ OCIs proposing to be part of FPIs based in IFSC.
Also, the condition for the fund manager entity to be a RBI regulated banks sponsored AMC in alternative 2 above would discourage the implementation of the abovementioned SEBI/ IFSCA proposal.
Overall, the proposal to relax the NRI participation limits in IFSC based FPIs is a positive move and would be welcomed by fund managers. Also, similar to any new framework, this framework for enabling higher NRI/ OCI participation in IFSC based FPIs would evolve over time and any difficulties being faced should be addressed by IFSCA in consultation by SEBI in the near future.
Punit Shah, Partner, Dhruva Advisors and Vishal Lohia, Associate Partner, Dhruva Advisors
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Published: 10 Jun 2024, 09:04 AM IST