Funds managed by NRIs seek Sebi relief

Non-resident Indian (NRI) offshore fund managers have requested the Securities and Exchange Board of India (Sebi) to allow them to own at least 5 per cent in their fund.

In a circular issued on April 10, the market regulator had reiterated that NRIs are not eligible to make investments as foreign portfolio investors (FPIs).

Sources said NRI-backed FPIs held fresh discussions with Sebi officials on Thursday. The regulator is expected to take a final call on the matter in a week, a source said.

The move assumes significance as several India-dedicated funds are currently operating in violation of the Sebi circular. If the issue is not resolved by December, they would be forced to wind up these funds.

Industry estimates suggest that a third of the total FPI assets are either managed by Indian entities or promoted by NRIs or person of Indian origin (PIO).

Under Sebi regulations, no NRI or PIO can be a “beneficial owner” of a foreign fund. He or she is also not eligible to make any investments as an FPI.

Pumping in seed capital in the fund is a popular practice while starting any pooled fund. This practice is called ‘skin in the game’ and helps instill confidence. In fact, it is a statutory requirement in many jurisdictions for starting a fund.

For instance, in Singapore, fund managers or founding members are required to put a mandatory seed capital of $240,000 or more at the time of starting a fund.

“Skin in the game is a common practice across the global asset management industry with some countries even making it mandatory. In such scenarios, Sebi regulations clash with the rules of foreign jurisdictions. Hence, the seed capital put in by NRI fund managers does not benefit the fund house but is just there to meet regulatory requirements. Hence, such practices should be exempted from any curbs,” said a source.

Money laundering concerns and regulatory arbitrage are the key reasons behind Sebi’s tough stance on NRI investments coming through FPIs.

The FPI regulations were framed to attract more foreign capital into the country. Hence, these funds have been provided several incentives, including easy registration process, flexibility in terms of taxation and compliance. Indian authorities fear that allowing NRIs to invest through the FPI route could lead to round-tripping. Also, it could open arbitrage opportunities as it would encourage local money to be funnelled through the FPI route to avoid taxes.