Level field restored

Sebi panel’s suggestions on FPI norms are pragmatic

Foreign investors worried over the new norms for know your customer (KYC) and beneficial ownership will be relieved after a group of experts set up by the market regulator made pragmatic recommendations that address many contentious issues. The Securities and Exchange Board of India’s April 10 circular put a blanket ban on any expatriate of Indian origin — non-resident Indian (NRI), person of Indian origin (PIO) and overseas citizens of India (OCI) — holding investments in India via the foreign portfolio investment (FPI) route. It also barred members of the diaspora from managing India-focused funds, going strictly by the definitions of “beneficial owner” and “control” in the Prevention of Money Laundering Act (PMLA). The diaspora has substantial investment in Indian equity — amounting to $75 billion, according to some estimates. Also, many senior executives in FPIs are of Indian origin. The circular would have meant a lot of inconvenience and financial loss and triggered enforced selling in many cases, where two or more funds from the same investment house were treated as having one beneficial owner and, therefore, deemed to have exceeded the limit of 10 per cent equity holding for a single overseas entity.

The panel, headed by former Reserve Bank of India Deputy Governor HR Khan, proposed on Saturday that NRIs be allowed to hold stakes of up to 25 per cent in FPI funds. In combination, NRIs can hold up to 50 per cent of an FPI fund in concert and PIOs and OCIs can be allowed to invest via the FPI route without any restriction. The panel’s clarification that the concept of BO should be applied only for KYC norms is crucial. This prevents the possibility of the 10 per cent limit being triggered. Where additional KYC is required, certain sensitive data (such as the US Social Security number) will not be collected, to alleviate concerns about data security. Moreover, in cases where the 10 per cent limit is exceeded, the FPIs in question will be given 180 days to divest holdings (or opt to be treated as foreign direct investors). The same regulations will apply to participatory note investments.

The changes suggested are non-discriminatory. Anybody can manage an FPI fund, and PIOs will be treated like other foreigners, rather than being singled out. Additional KYC is being collected without demanding highly sensitive information, which investors will hesitate to provide to a country with no data protection law. If accepted in entirety, these recommendations should also address regulatory concerns about money-laundering and round-tripping of funds via the hawala-to-equity route. On its part, Sebi will consult the government to define what it considers “high-risk” jurisdictions, with a history of tax evasion and high banking secrecy, where tighter norms of ownership and KYC may be applied. Sebi also needs to identify possible loopholes in the regulatory structure which make money-laundering possible. It would be sensible to prepare a discussion paper on the subject, perhaps in consultation with the RBI, and the tax authorities. The April 10 circular was drafted with the best intention but the lack of clarity caused a lot of confusion. Much of the trouble could have been avoided if Sebi had presented the earlier draft for public feedback and consultation before framing the regulation. But the markets regulator has done well by quickly responding to the concerns.