Sebi’s FPI norms put billions of inflows at risk

Funds operating through common trustees could be in breach of 10% investment cap

The Securities and Exchange Board of India’ s( Se bi’ s) move to club the investment limit for foreign portfolio in vestors (FP Is) purchasing Indian shares based on the identity of beneficial owners may jeopard is eb ill ions of dollars coming into India from off shore funds.

Global asset managers such as Fidelity, Black Rock, and Temple ton run multiple offshore funds that put their money into Indian equities. All of these funds are likely to identify a single beneficial owner( BO) or a senior managing official( S MO) as BO across all funds, said experts. SM Os are designated B Os merely by virtue of their position and do not have any ownership in the foreign portfolio investments.

Funds that operate through common trustees could also see their investments get club bed by virtue of having a common BO in the form of a trustee. Japanese funds, forinstance, necessarily have to appoint a trustee before going offshore. The Japanese market has eight to 10 large trustees, and each one maybe a trustee to 100-200 funds, said experts.

“It is very likely that these trustees maybe nominated as B Os. And, all the funds coming through the trustees will get one investment limit even though they are all separate funds and operate independently ,” said a person familiar with the matter.

According to the market regulator’ s norms, the purchase of equity shares of each company by a single F PI or an investor group should be less than 10 percent of the paid-up capital of the company.

Se bi’ s April 10 circular states :“In case the same set of B Os are constituents of two or more F PI sand such investors have common B Os of more than 50 percent int hose FPIs, all such FPIs will be treated as forming part of an investor group and the investment limit so fall such entities shall be club bed at the investment limit as applicable to a single foreign portfolio investor .”

Custodians report the holding so FFPIS/ investor groups to depositories, who monitor the investment limits. F PI scan as certain whether they form part of an investor group through designated depository participants.

For instance, if one of Fidelity’ s funds buys 4 per cent in TC Sand another buys 7 percent, the individual funds remain well within their limits, but Se bi’ s 10 percent cap will get breached once these investments are club bed.

What compounds the situationist hat most of these funds operate independently and do not share information about the percentage or amount of investment in stocks.

“None of these funds will share any information with each other. Nor will there be any common place to check who has bought what,” said another person. Experts believe that some offshore funds may prefer to stop their India investments rather than get into a regulatory breach. The FPIs investing in breach of the prescribed limit have to divest their holdings within five trading days from the date of settlement of the trades causing the breach. Alternatively, the investment by such FPIs shall be considered as investment under FDI at the FPI’s discretion. The FPIs cannot hold equity investments in a particular company under both the FPI and FDI route.

The threshold for identification of BOs of FPIs on controlling ownership interest is 25 per cent in case of companies and 15 per cent in case of partnership firms. For high-risk jurisdictions, the threshold is lower at 10 per cent. The April circular had clarified that non-resident Indians, persons of Indian origin, and overseas citizen of India are not eligible to make investments as FPIs. The intent of the circular is to prevent money laundering.