The capital markets regulator held a few meetings about a month ago with some of the custodian banks and few large consultants to revisit the proposal to relax conditions on NRIs investing through an FPI vehicle, a registered fund pooled in a tax haven such as Mauritius and Singapore, three persons aware of the discussions told ET.
At present, NRIs and persons of Indian origin (PIOs) can either directly invest at an individual level like any resident investor, by opening a stock demat account with a bank or broker in India, or put money with an FPI, letting a fund manager handle the investments.
However, no single NRI can have a share of more than 25% in an FPI corpus, while NRIs as a group can contribute a maximum of 49% in an FPI – curbs that many feel have slowed non-residents’ inflows into the stock market.
Siddharth Shah, partner at law firm Khaitan & Co, said, “It is high time the government addresses this issue of NRI participation in FPIs -either by removing or diluting restrictions under FPI route, or by collapsing the PIS (portfolio investment scheme) route into FPIs.”
“It is honestly a lost opportunity for the country by imposing such restrictions of 49% cap for NRI participation in FPIs,” said Shah. “Having such restrictions on NRIs under the FPI route is also perceived by the global Indian diaspora as being offered ‘second class treatment,’ where other non-residents of non-Indian nationalities or origin are given a red-carpet welcome.”
The portfolio investment scheme allows NRIs to trade stocks in the secondary market.
Phased Opening of FPIs
The 25/49 rule is aimed to minimise round-tripping of money and a misuse of the regime. However, there is a growing perception that such fears are overstated and regulatory hurdles put India at a disadvantage to China, which receives large inflows from its diaspora.
While the PIS route is under the Reserve Bank of India (RBI), FPIs are registered and regulated by the Securities & Exchange Board of India (Sebi). Merging the two regimes would require the consent of the two regulators, the green signal from the ministry of finance and a new regulation where PIS would be deemed to be FPIs.
“Tactically, if the government wishes to open the FPI route for NRIs in a phased manner, at the first stage, they should at least consider removing the restriction for NRI participation for funds/FPIs registered out of IFSC in India, namely, GIFT City. This would not only help promote GIFT City among global fund managers but should also give more comfort to policy makers from a round-tripping or KYC (know your customer) perspective, given that these structures would be regulated by a domestic regulator like IFSC Authority,” said Shah of Khaitan & Co.
While several banks have set up branches in GIFT City to book external commercial borrowings and trade non-deliverable forwards, the financial services centre in Gujarat is yet to attract offshore fund managers from Mauritius or Singapore.
“Sebi has, in the past, taken a pragmatic approach on this issue, when it permitted FPIs with 100% NRI participation to invest in mutual fund units,” said Sameer Gupta, tax leader at EY India. “Given the maturity of the Indian capital markets, strengthening of KYC norms and ever-growing Indian diaspora, this would be an opportune moment for Sebi to consider further liberalisation/simplification of investment norms and permit majority NRI/OCI (overseas citizen of India)-owned FPIs to invest in wider capital markets.”
