Facilitating Increased Participation of NRIs and OCIs in SEBI Registered FPIs

Key Takeaways:

1. Objective: Enhance investments by FPIs in India by facilitating increased participation from NRIs and OCIs as constituents of FPIs based out of IFSCs in India and regulated by IFSCA, while putting in place adequate measures to mitigate the risks emanating from such investments.

2. Background: The historical context of NRIs’ and OCIs’ participation in FPIs and the regulatory developments leading to the current proposal.

3. Current Regulatory Provisions: Details of the current regulatory provisions with respect to NRIs and OCIs as participants of FPIs.

4. Demand to Increase the Quantum of Contribution by NRIs/OCIs in the Corpus of FPIs: The rationale behind the demand and the challenges faced by FPIs and IFSC funds.

5. Risks of Allowing NRIs/OCIs to Contribute Without Any Limits to Corpus of FPIs: The risks associated with allowing NRIs/OCIs to contribute without limits and the historical context of market manipulation by similar entities.

6. Current Situation and Need for Review: The existing regulatory framework, surveillance, and monitoring mechanisms, and the need for a review in light of the identified risks.

7. Proposal and Rationale: The proposed framework for channelizing NRI/OCI investments in the Indian securities markets through the FPI route, along with the rationale behind the proposed measures.

8. Public Comments: The invitation for public comments on the proposals outlined in the consultation paper.

Synopsis:

The Securities and Exchange Board of India (SEBI) has released a consultation paper on permitting increased participation of Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) into SEBI registered Foreign Portfolio Investors (FPIs) based out of International Financial Services Centres (IFSCs) in India and regulated by the International Financial Services Centres Authority (IFSCA). The objective of this consultation paper is to enhance investments by FPIs in India by facilitating increased participation from NRIs and OCIs as constituents of FPIs based out of IFSCs in India and regulated by IFSCA, while putting in place adequate measures to mitigate the risks emanating from such investments.

Background

During the Foreign Institutional Investors (FIIs) regime, NRIs were not allowed to register as FIIs or sub-accounts (SAs). However, funds having NRIs as constituents (investors) were not prohibited from obtaining registration as FIIs or SAs. With the introduction of the FPI regime in 2014, the aforementioned position was carried forward in the context of FPIs. NRIs/OCIs were not eligible for registration as FPIs; however, they could be investors in FPIs. Companies majority owned by one or more NRIs that were appropriately regulated were eligible for registration as FPIs under the SEBI (FPI) Regulations, 2014, for acting as investment managers for other FPIs.

In order to review the Know Your Client (KYC) compliances for FPIs, a thematic study was conducted in 2017 by SEBI with Custodians and Designated Depository Participants (DDPs), for further strengthening the KYC process for FPIs. Thereafter, SEBI, vide circular dated April 10, 2018, clarified that Resident Indian (RIs)/ Non-Resident Indians (NRIs) / Overseas Citizens of India (OCIs) cannot be Beneficial Owners (BOs) of FPIs. However, it was also clarified that if an FPI is an Investment manager of other FPIs and is a non-investing entity, it may be promoted by NRIs/OCIs.

The circular generated widespread discussions and debate, leading to representations being received by SEBI from various stakeholders. Subsequently, a working group under the Chairmanship of Shri Harun R. Khan, Deputy Governor (Retired), Reserve Bank of India (RBI), was entrusted with the responsibility of looking into the issues emerging from the circular dated April 10, 2018. The report submitted by the working group was put up for public consultation and thereafter put up for consideration of the SEBI Board in the meeting held on September 18, 2018. Post receipt of approval from the Board, the guidelines for NRIs/OCIs being constituents of the FPI were spelt out vide SEBI circular dated September 21, 2018, which have now been incorporated in the Master Circular for FPIs and DDPs issued on December 22, 2022 under the SEBI (FPI) Regulations, 2019.

Current Regulatory provisions with respect to NRIs and OCIs as participants of FPIs

Regulation 4(b) of the FPI Regulations states that the FPI applicant cannot be an NRI or OCI. Further, Regulation 4(c) states that NRIs or OCIs or Resident Indian individuals (RIIs) may be constituents of the applicant provided they meet the conditions specified by the Board from time to time. These conditions are mentioned in Para 1 (ii) of Part A of the Master Circular and include provisions related to the contribution of NRIs, OCIs, and RIs, control of the applicant, and compliance requirements for non-investing FPIs or FPIs investing only in units of schemes floated by mutual funds in India.

Demand to increase the quantum of contribution by NRIs/OCIs in the corpus of FPIs

There has been a constant demand for channelling more NRI/OCI investments in the Indian securities markets by facilitating greater participation of NRIs/OCIs in the corpus of the FPIs. It is a stated policy decision of the Government to facilitate higher NRI investments into the country. The Hon’ble Finance Minister had also acknowledged in the budget speech in July 2019 that even though India is the world’s top remittance recipient, NRI investment in Indian capital markets is comparatively less.

Risks of allowing NRIs/OCIs to contribute without any limits to corpus of FPIs

The consultation paper also highlights the risks associated with allowing NRIs/OCIs to contribute without any limits to the corpus of FPIs. It mentions the perils of allowing access to the securities markets to such persons/entities, as evidenced by the role of Overseas Corporate Bodies (OCBs) in the stock market scam of 2001. The report of the Joint Committee on Stock market Scam and matters relating thereto (‘JPC Report’) presented to Lok Sabha on December 19, 2002, focused on the role of OCBs in the stock market scam of 2001, due to their close proximity with Indian entities/ promoters of Indian entities.

Proposal and Rationale

The consultation paper proposes a framework for channelizing NRI/OCI investments in the Indian securities markets through the FPI route. It suggests that the aggregate contribution of NRIs/OCIs beyond 50% of the corpus of the FPI may be permitted, but only to such FPIs that are based out of International Financial Services Centres (IFSCs) in India and regulated by the International Financial Services Centres Authority (IFSCA). The proposal aims to balance the requirement of facilitating and increasing the avenues for investment from NRIs/OCIs in the country with appropriate risk mitigation measures to address the concerns listed in the JPC report.

The proposed framework includes conditions for allowing NRIs/OCIs to contribute to the corpus of FPIs, requirements for granular details of entities holding ownership, economic interest, or control in the FPI, and the need for an identifier issued by the Government of India from the BOs in case the BO is a NRI/OCI.

Public Comments

The consultation paper invites public comments for the proposals given above. Interested parties are requested to provide their comments and suggestions in a specified format and send them to the designated authorities by the specified deadline.

The consultation paper reflects SEBI’s efforts to strike a balance between facilitating increased participation of NRIs and OCIs in FPIs and mitigating the associated risks, while also seeking input from stakeholders to ensure a comprehensive and well-informed decision-making process.

FAQ

Q1: What is the objective of the consultation paper?

A1: The objective is to enhance investments by FPIs in India by facilitating increased participation from NRIs and OCIs as constituents of FPIs based out of IFSCs in India and regulated by IFSCA, while putting in place adequate measures to mitigate the risks emanating from such investments.

Q2: What are the current regulatory provisions with respect to NRIs and OCIs as participants of FPIs?

A2: The consultation paper provides details of the current regulatory provisions, including the conditions specified by the Board for NRIs, OCIs, and Resident Indian individuals as constituents of FPIs.

Q3: What are the risks associated with allowing NRIs/OCIs to contribute without any limits to the corpus of FPIs?

A3: The consultation paper outlines the risks associated with allowing NRIs/OCIs to contribute without limits, drawing from historical instances of market manipulation and circumvention of regulatory requirements.

Q4: What is the proposed framework for channelizing NRI/OCI investments in the Indian securities markets through the FPI route?

A4: The proposed framework includes conditions for allowing NRIs and OCIs to contribute to the corpus of FPIs, subject to specific criteria and regulatory oversight, particularly for FPIs based out of IFSCs in India and regulated by IFSCA.

Q5: How can stakeholders provide feedback on the proposals outlined in the consultation paper?

A5: Stakeholders can provide feedback by following the format provided in the consultation paper and submitting their comments to the specified authorities by the given deadline.