Global private banks ask FPI managers not to sell NRI clients’ investments

MUMBAI: Global private banks, dealing with the rich and ultrarich, have told managers of foreign portfolio investors (FPIs) to refrain from selling off investments by their non-resident Indian (NRI) and overseas citizens of Indian (OCI) clients to meet the rules laid down by Securities & Exchange Board of India (Sebi).FPIs have to bring down the aggregate contribution of NRIs and OCIs (along with resident Indians) in a fund to below 50% by December 31, 2020. Also, contribution by an NRI/OCI cannot exceed 25%. Funds which fail to do this will have to wind up in six months.To meet this requirement, India dedicated FPIs with large money have been redeeming investments proportionately — selling stocks to return the money to investors. However, the international private banks want absolute contributions of their clients to remain unchanged. “They are asking for a formal undertaking from FPI managers that future investments by their NRI/OCI clients will not be redeemed to meet the 25-50% rule. But most FPIs are reluctant to give any formal assurance. As a result, we cannot empanel these global banks which were an easy source to tap money from NRIs, PIOs (Persons of India Origin) and OCIs,” said an official of an Indian financial services house managing an FPI.Till last week the Sebi has not given any indication that it may relax the 25-50% regulation, despite multiple representations made by several offshore funds. Besides, an NRI controlled investment manager (or the asset management company) running an FPI must register itself as a ‘non-investing FPI’ with Sebi.“In the last past two weeks there has been a scramble for getting themselves registered as non-investing FPIs by many funds. Even if a fund lowers the NRI contribution to meet the Sebi condition, the manager must become a non-investing FPI if it is controlled by NRIs/OCIs,” said Richie Sancheti, partner at the law firm Algo Legal. “Both tests have to be met independently,” said Sancheti.The manager of a non-investing FPI cannot invest the AMC or proprietary money (though the fund can continue to invest as long as the NRIs limits in the FPI are not breached). 79984374Indian brokerages and banks which have floated FPI vehicles abroad believe that unless there is a rethink on the rule, which stems from a regulatory paranoia about fund round-tripping and tax evasion, the vast Indian diaspora cannot be effectively tapped.“When an Indian bank or brokerage taps investors abroad, they naturally approach NRIs and PIO who can relate to the India story. One of the ways to attract that money is through global private banks who may give a single cheque on behalf of seven to 10 clients. Now, when we are asking them for a break-up of NRI and non NRI clients, they want a written undertaking so that their NRI clients’ investments are not hastily redeemed in future,” said an official with a large brokerage. While NRI contribution in FPIs is comparatively patient money, the NRI limits in a fund can be quickly breached if there is a sudden selloff by foreign investors.Against this backdrop, many financial services providers in GIFT City think that the government, along with Sebi and Reserve Bank of India, should permit NRI dominated FPIs to trade on stock exchanges if the money is pooled in a vehicle in the GIFT International Financial Services Centre and there are adequate regulations on the investment manager. “If alternative investment funds (or private equity and venture capital funds) can have more flexible rules compared to domestic alternative investment funds (AIFs), FPIs structures in GIFT can also have easier rules. This would enable GIFT to compete with Mauritius, Singapore and Cayman,” said a person familiar with the subject.Unlike domestic AIFs, such funds in GIFT are allowed to leverage while RBI, after years of dithering, has recently allowed resident Indians to open foreign currency accounts with banks in GIFT by transferring funds under the central bank’s liberalised remittance scheme. “The IFSC authority — the new regulator for the financial centre — would pursue the matter with the government,” said the person.

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