What is the Issue?
- A recent circular by Securities and Exchange Board of India gave registered Foreign Portfolio Investors (FPIs) a deadline to provide a list of their beneficial owners.
- It also said to close the structures where Non-Resident Indians, persons of Indian origin (PIOs) or Overseas Citizens of India (OCI), are the majority share holders.
- It is a follow-up on an April directive which sought KYC details from foreign investors.
What does the circular says?
- NRIs have been barred from registering as FPIs investing in India right from the time SEBI revamped its Foreign Portfolio Investors Regulations in 2014.
- The main intent behind this rule is to curb round-tripping and laundering of unaccounted money through the FPI route.
- The April circular did direct all FPIs to identify their beneficial owners.
- It was based on the criteria of 25 per cent ownership interest for companies, 15 per cent for other entities and 10 per cent for ‘high-risk jurisdictions’.
- It also clarified that companies that were majority-owned by NRIs or PIOs were not allowed to invest through the FPI route in India and must close such structures.
What are the concerns with this circular?
- The move was to characterize fund managers as ‘beneficial owners’ of FPIs where their actual owners aren’t identifiable.
- A beneficial owner is a person who enjoys the benefits of ownership even though title to some form of property is in another name.
- However most offshore funds investing in India hire locals or persons of Indian origin to oversee their portfolios.
- Not only is a disclosure-based regime sufficient to track down cases of round-tripping.
- SEBI can perhaps rethink the more drastic provisions of this regulation.
What are the reactions of FPIs in this regard?
- AMRI, a lobby group for FPIs, termed it as vague, opaque and even discriminatory.
- It has also warned that $75 billion of FPI investments in India could flow out if SEBI implements the circular.
How does it affect the Indian Economy?
- This controversy broke out at a worse time for the economy.
- Rupee value depreciation, tightening global liquidity and increasing oil prices are the various challenges faced by Indian Economy at this time.
- So, India badly needs foreign fund flows to bridge its trade deficit.
What is the way forward?
- Regulators need to engage in a public consultation process about this decision.
- It should also clearly say their reasons behind such decisions.
- It becomes inevitable when they attempt a substantial overhaul of their ground-rules for the Indian markets.
Source: Business Line
