Sebi’s FPI regulations likely to have limited impact on private equity industry
Sebi’s FPI regulations may affect funds investing in public markets via so-called private investment in public enterprises strategy
Mumbai: The Indian private equity (PE) industry is expected to see an impact, albeit a limited one, from the Securities and Exchange Board of India (Sebi) circular restricting non-resident Indians (NRIs) and person of Indian origin (PIOs) from being fund managers or owners in India-focused overseas funds.
The guidelines, issued in April, said that a company majority owned by NRIs or PIOs will not be allowed to invest as a foreign portfolio investor (FPI) in the country. Sebi has directed that such funds should either be closed or the ownership structure changed by the end of December.
Asset Management Roundtable of India (AMRI), a lobby group, on Monday, said that the new FPI norms will immediately impact investments of about $75 billion from overseas funds, reported the Press Trust of India.
Industry experts, however, believe that the private equity industry will see limited impact, largely affecting funds investing in the public markets through the so-called private investment in public enterprises (PIPE) strategy.
“If a PE fund has set up an FPI vehicle to do PIPE market deals then it can impact them if there is an NRI/PIO who is acting as the lead fund manager, and there is no other identifiable natural person, who is the beneficial owner as per the KYC tests or if the control/management shares are owned by an NRI/PIO. In such a scenario, there will be an impact for the fund under the current circular by Sebi,” said Tejesh Chitlangi, senior partner at law firm IC Universal Legal.
Only PIPE funds, or PE funds with a strategy of taking less than 10% stakes in listed companies can see the impact in the aforesaid scenarios, he added.
“However, that is a small set of PE investors. Classic offshore PE and VC investors will not see an impact.”
PE funds focussing on such strategies include big domestic PE managers such as Westbridge Capital and ChrysCapital, among others.
According to a PE fund manager, who runs a PIPE-focused offshore fund, most fund managers operating from offshore geographies will be impacted and people are looking to make appropriate changes.
“Most people have NRI directors, unless the fund is being set up by a financial institution like a bank. We are looking to change the directorship to foreign directors. The PE industry has also made representations to the regulator,” he said, requesting anonymity.
He added that Mauritius-based funds will have an additional problem.
“There is also an issue with service providers in Mauritius as several people are PIOs and so the issue is aggravated further. A lot of people working there are third- or fourth-generation Indians.”
On Tuesday, Reuters cited unnamed people saying that Sebi is open to making changes in rules on ownership by overseas citizens of Indian origin or non-resident Indians of foreign funds investing in financial markets.
The regulator is open to changes to address genuine investor concerns, Reuters reported.
The benchmark Sensex fell 154.6 points, or 0.4%, on Tuesday to close at 38,157.92 points.
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