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.