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Mumbai: Foreign portfolio investors (FPI) from China may face restrictions in India with the government and markets regulator considering including mainland China and Hong Kong in Securities and Exchange Board of India’s (Sebi’s) list of high-risk jurisdictions, two people with direct knowledge of the matter said.

The Department of Economic Affairs (DEA) has drafted a proposal to this effect and is currently working on its modalities, they said, requesting anonymity.

Investments from high-risk jurisdictions attract greater scrutiny from regulators and those providing custodial services.

Sebi-registered foreign portfolio firms invest in India through 56 jurisdictions. Funds coming in from jurisdictions that are not compliant with the regulations laid down by the Financial Action Task Force, or FATF, are considered high-risk.

FATF is an inter-governmental policymaking body that monitors money laundering and terror financing.

India’s wariness of Chinese investments has grown in the aftermath of the coronavirus pandemic and subsequent border skirmishes.

Equity indices have been falling sharply across economies as the world grapples with the pandemic. This has made many bellwether stocks cheaper and affordable for both domestic and foreign investors. Last month, Housing Development Finance Corp. Ltd said the People’s Bank of China (PBOC) had raised its stake in the Indian lender to 1.01% from 0.8% in the March quarter through open market purchases, prompting concerns about foreign acquisitions of strategically important Indian companies in a depressed market.

Currently, there are only 16 registered FPIs from mainland China but Hong Kong has 111 registered FPIs investing in Indian markets.

The US government on Wednesday said it could no longer certify Hong Kong’s political autonomy from China, a week after Beijing declared its intention to pass a national security law curtailing the rights and freedoms of Hong Kong citizens.

“If the (DEA) proposal is accepted then FPIs from these two locations would face stricter know-your-client (KYC) requirements, not just at the time of registration but also on a continuous basis—they would need to comply with higher reporting standards," said the first person cited above. Once approved, this would be applicable for firms that have 10% of their funds coming from either China or Hong Kong as the end beneficiary but the rules are yet to be finalized," this person said.

“New FPIs coming from either China or Hong Kong would require prior Sebi approval after proper vetting. The specific modalities are being worked out by the DEA," said the second person.

The government has already restricted foreign direct investment (FDI) from countries that share a border with India, including China, but also Hong Kong. Since the 22 April notification under Foreign Exchange Management Act (FEMA), any FDI coming from these countries needs prior approval from the government. While the FDI route has been restricted, the FPI route is still open.

To be sure, FPI ‘control’ of Indian companies is already restricted as a single FPI cannot hold more than 10% of the paid-up capital of a listed company.

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