Mumbai: The woes for non-resident Indian (NRI) fund managers have not ended. A modified circular on foreign portfolio investors (FPI) eligibility and identification of beneficial ownership issued in September has made it difficult for them to create viable structures in compliance with the law, said three fund managers, requesting anonymity. The issues were also discussed at a meeting of the high-powered panel headed by former Reserve Bank of India deputy governor H.R. Khan on 26 November.

On 10 April, the Securities and Exchange Board of India (Sebi) had issued a circular barring NRIs, persons of Indian origin (PIOs) and overseas citizens of India (OCIs) from being a beneficial owner.

The move had sparked concerns of fund restructuring and winding up of structures which could lead to large outflows from the Indian equity markets.

Subsequently, after its board meeting on 21 September, Sebi rolled back most of these restrictions based on the recommendations of the Khan panel.

“While the majority of concerns were addressed, there are still some issues, such as NRIs cannot be majority owner in a fund, around high risk jurisdiction and reporting of beneficial owner," said one of the fund managers.

Here is the catch. Sebi’s new rules say that a fund needs to have 51% money from overseas investors and 49% from NRIs, meaning, NRIs cannot be in control of the fund.

“But most NRI fund managers and resident Indian fund managers manage only NRI money. So, maintaining the 51% clause of foreign money is a tall task," said the second fund manager.

“Restricting aggregate NRI/OCI participation to less than 50% of the FPI corpus is devoid of merit. The fact that there is a direct investment route available for NRIs to take exposure in Indian securities does not warrant such restrictions on legitimate KYC (know your customer)-compliant NRI inflows through FPIs," said Tejesh Chitlangi, senior partner, IC Universal Legal.

However, the market regulator has traditionally not been in favour of structures that are majority-owned by NRIs or PIOs. It believes such structures will be prone to abuse and manipulation.

Besides, the requirement of revealing the ultimate beneficiary “at any time" contradicts certain privacy policies of foreign banks. Sebi has mandated that FPI structures from the date of issue of the circular need to report ultimate beneficiary every six months and provide data whenever asked for.

“Fund managers are facing resistance from global brokers as their clients are coming from omnibus structures and foreign banks are reluctant to give this data to fund managers," said the third fund manager.

Another niggling issue is on the “high risk jurisdiction". The Khan panel had recommended that Sebi and the government of India should coordinate and come up with criteria to identify them.

In the absence of new criteria, fund managers are dealing with a very broad set of rules, which is not consistent across custodians.

“The ‘high risk jurisdiction’ classification is very widely defined by Sebi, and continue to remain vague. It is also not consistent across custodians, hence, requiring more stringent KYC and BO (beneficial owner) identification norms to be applied on FPIs coming from such jurisdictions," said Chitlangi.

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