Foreign investors to tap Sebi over curbs on NRI investment

Foreign portfolio investors (FPIs) are working on a representation urging market regulator to scrap the upcoming limits for non-resident Indians (NRIs) investing in their schemes, said two people aware of the matter.

In November 2019, the Securities and Exchange Board of India (Sebi) ordered that by December 2020, no single NRI can be the beneficial owner of more than 25% of any foreign fund’s asset under management (AUM), and cumulatively, NRIs cannot hold more than 50% of the AUM. While Sebi did not attribute a reason for its decision, it is believed that the regulator wanted to keep a check on money laundering and round-tripping.

As per the draft representation prepared by the FPIs, due to the covid-19 pandemic, the ensuing lockdown and economic contraction, many India-dedicated funds may have seen a disproportionate rise in the weightage of money from NRIs, overseas citizens of India (OCI) and persons of Indian origin (PIO) vis-a-vis pure FPI money. The increase in such investments could have led to the threshold of 50% being breached or likely to be breached going ahead, the people cited above said, seeking anonymity.

The representation drafted by FPI lobby group Asset Managers Roundtable of India (AMRI) says removing these restrictions would attract more capital, help homegrown asset managers and increase market depth over time. Mint has seen a copy of the draft representation.

“Covid-19 has adversely impacted all travel plans and this is significantly hurting business development. Due to lack of in-person meetings with clients, business expansion has taken a beating and funds have not seen fresh foreign inflows. This trend is likely to continue over the next six-nine months and this will definitely affect future fund-raising prospects as well. We also envisage further fund outflows. The cap on investments by NRIs through the FPI route will only make matters worse,” said one of the two persons cited above, adding that Sebi’s suspicion is restricting the growth of home-grown asset managers.

Custodians are also not clear about the repercussions on active and passive breaches.

“It is unclear on what will be the regulatory action if funds are found to be breaching the 50% cumulative threshold and 25% individual thresholds. Custodians are in communication with Sebi over this,” said the second person.

“Asset managers of Indian origin are normally well known in their home country and to individuals like NRIs who have an affiliation with India. Naturally then, NRIs become prospective clients for scaling the business activity globally. It takes time and investment to build a brand globally. Hence, this restriction of NRIs in place for the asset managers acts as a deterrent to Indian home-grown asset managers,” he added.

According to NRI fund managers, NRIs and OCIs are normally long-term investors in Indian equities as compared to foreign investors.