Sebi seeks details of investments by NRIs, overseas Indians in FPIs

Mumbai: The Securities & Exchange Board of India (Sebi) is assessing whether curbs on foreign portfolio investors (FPIs) running on money from non-resident Indians (NRIs) would hurt the market.In an email on November 18, the capital market regulator has asked financial institutions which act as custodians of FPIs to identify the offshore funds where NRIs, overseas citizens of India (OCIs) as well as resident Indians (RIs) are investors; and, the number of FPIs where such investors are in majority.FPIs were earlier told by Sebi to bring down the aggregate contribution of NRIs, OCIs, and RIs to below 50% by December 31, 2020. Also, the share of a single NRI or OCI or RI cannot exceed 25% of the corpus of a fund. (Resident Indians can also invest in certain FPIs by transferring money under RBI’s liberalized remittance scheme)A week ago an industry body representing NRI investors, and managers of funds backed by NRIs and persons of Indian origin requested the government and the regulator to end the restrictions. “Under the circumstances, Sebi is trying to get a sense on the quantum of NRI investments, the number of funds dominated by NRIs, and whether redemptions could impact the market in any significant way,” said a senior broker.However, the custodians and their FPI clients are unsure how to respond to the recent query from Sebi. “Custodians do not compile investor data based on residency or citizenship. So, custodians will have to ask the information from respective FPIs, who in turn will have to reach out to their clients. In cases where NRIs/OCIs are investing through a private bank, the bank will have to share the names of the ultimate beneficial owners,” said a fund administrator. “It’s not normal practice to ask for such investor level information unless there is an investigation,” he said.“Also, the regulator wants to know to what extent NRIs and OCIs are investing through large, mainstream FPIs which are not dominated by NRIs. If Sebi figures out that NRI and OCI investment is widely dispersed and coming through a large number of FPIs, they will retain the restrictions on NRI investment,” said a fund official.Typically, custodians — as required under India’s anti-money laundering law — maintain information on beneficial owners (BOs) of a fund. BOs are investors having 25% or more share of the fund. An investor can be a BO even with lesser contribution if it controls the asset management company of the fund or has a say in decision making and key appointment. The BO threshold contribution is 10% is the fund is based out of a high-risk jurisdiction.79358266However, many NRIs may remain below BO threshold level — either unwittingly, due to the size of their investments, or deliberately to stay below the radar. India-dedicated funds which tap the Indian diaspora will have the information on NRI/OCI investments, but other FPIs do not collect such data as they do not ask for such information from investors. Now all FPIs, as per the Sebi’s email, have to specify how many NRIs have invested in the fund. “Most custodians don’t have the data. So, many are giving incomplete or dated info,” said a source.The 25% /50% rule owes its origin to concerns about fund round-tripping and money laundering. Earlier, Sebi used to insist that FPIs should be broad-based: minimum 20 investors, with no investor having more than 20% share. This rule has been done away with.

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