On Monday, a group of foreign portfolio investors (FPIs) got together and claimed that investments worth $75 billion were at risk because of a Securities and Exchange Board of India (Sebi) circular issued in April this year. The directive from the capital market regulator puts curbs on funds managed by overseas citizens of India (OCIs), persons of Indian origin (PIOs) and non-resident Indians (NRIs).
On Tuesday, Sebi reacted to the suggestion with an uncharacteristically strong statement: “It is preposterous and highly irresponsible to claim that 75 billion dollars of FPI investment will move out of the country because of Sebi’s circular issued in April 2018."
What’s far more preposterous is Sebi’s haphazard policymaking process, which in this case has culminated in a public argument with part of the FPI community.
The chief grouse of the above-mentioned FPIs is that the circular bars structures where OCIs, PIOs and NRIs control the investment decision and also have beneficial ownership in the fund. The FPIs claim that one of the key requirements of investors is that their fund managers put their money where their mouth is, or their skin in the game, which is why they have beneficial ownership in the funds they manage.
Sebi, on the other hand, will have none of this, since it smells money laundering and round tripping whenever it sees an Indian name in an overseas fund investing in the country. The big problem with this position is that the regulator hasn’t bothered to show examples of money laundering through funds that are managed by OCIs, PIOs and NRIs. If the route is a big worry for the regulator, perhaps it has seen the structure being misused often. Have its investigation teams unearthed such scams and have any such cases been prosecuted?
And if the FPIs in question are already required to disclose the list of beneficial owners under Sebi’s know-your-client norms, shouldn’t that provide the regulator enough comfort?
The capital market regulator hasn’t articulated any of this, because it didn’t bother discussing the rationale of the move when it issued the circular in April. Again, this is poor form on the part of Sebi. The least it could have done is put out a discussion paper that lists the dangers of the structures it is worried about, and gone through a public consultation process, before issuing a circular.
The FPIs who have now gone public with their grievance, five months after the circular was issued, seem to have tried having consultations, before eventually giving up. True, it might be preposterous on their part to claim that overseas investors and fund managers won’t figure out some workaround and that not all of the $75 billion worth of investments may be at risk. But that exaggeration could be perhaps excused when juxtaposed with Sebi’s bizarre policymaking process that puts at risk even legitimate investment structures in an attempt to nail some unidentified villains.
At the end of the day, the capital market regulator’s new rule is another attempt to put blanket curbs on an entire market segment, to hide its ineptitude in nailing those who violate its rules (bit.ly/2Cn8w8y). The need of the hour at Sebi is better enforcement and less mindless rule-making.