26 FPIs get Sebi’s rap, Canada funds most hit

Sebi’s move comes at a time FPIs have pulled out upwards of  ₹38,000 crore in Feb. (Photo: Mint)
Sebi’s move comes at a time FPIs have pulled out upwards of 38,000 crore in Feb. (Photo: Mint)


  • Pension funds, trusts and insurers, mostly from Canada, to be hit
  • A Canadian of Indian origin runs one such fund facing a problem in getting fresh registration, said an official

MUMBAI : The Securities and Exchange Board of India (Sebi) last month sent out letters directing cancellation of registrations of 26 foreign portfolio investors (FPIs) from jurisdictions that aren’t signatories to a multilateral framework for cooperation in securities regulation.

The majority of them are based in Canada, said two people with direct knowledge of the matter. “They have been told to shut down their funds and unwind their positions within the next six months," one of the two people said, requesting anonymity.

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The funds affected by Sebi’s move include pension funds, trusts and insurance companies. “These are good funds, and Canada is a safe jurisdiction. This narrow view taken by the regulator is restricting not just existing fund flows but also hindering fresh registrations from certain Canadian provinces," the person said.

The person said a Canadian of Indian origin runs one such fund facing a problem in getting fresh registration.

As of 31 December, investments from Canada in Indian stocks and debt totalled 1.79 trillion, making it the seventh-largest country in terms of FPI flows into India.

An email query sent to spokespeople for Sebi was not answered immediately.

The matter relates to Sebi’s introduction of new foreign institutional investors (FIIs) rules in 2014. The older norms required funds to register with Sebi directly, while the new one allowed FPIs to register with custodians or depository participants. It was meant to reduce the compliance burden on foreign investors.

The changed norms, however, required FPIs to be a resident of a jurisdiction whose securities regulator is a signatory to the International Organization of Securities Commissions (IOSCO) or have a bilateral understanding with Sebi.

Canada has four agencies regulating various securities—Ontario Securities Regulator, Alberta Securities Commission, British Columbia Securities Commission and Autorité des marchés financiers. Of them, only Ontario Securities Regulator and Autorité des marchés financiers are IOSCO signatories. As a result, funds regulated by non-signatory agencies are ineligible to register in India as FPIs.

“In June 2016, Sebi issued a FAQ that said all foreign investors registered under the erstwhile regime were supposed to be grandfathered," said the second of the two people cited above.

“All existing FIIs and SAs (sub-accounts) are deemed FPIs. They can continue to deal in Indian securities till the validity period of FII/SA registration, for which the fee has been paid. After the validity period, they can continue to deal as FPIs subject to payment conversion and registration fees," Sebi had said in the FAQ.

“Basis this understanding, these funds continued to exist for the past eight years and held their positions and bets in Indian markets. But a month back (February), the regulator took a different interpretation of its own regulations and reviewed all these funds. Post the review, the regulator said it does not recognise the FAQs but what is laid out in the regulations and directed the funds to shut down and wind up positions," said the first person cited above.

The regulator’s move comes at a time FPIs have pulled out upwards of 38,000 crore in February from Indian markets.

“All this while the funds continued in India basis the understanding from Sebi issued FAQs. But suddenly, this change in policy comes after eight years; it hampers the very idea of ‘ease of doing business’. Since it is a policy change, many other funds may receive such letters, putting the flows from Canada (and such non-IOSCO countries) in jeopardy," said the second person.

There are a total of 509 funds investing in India from Canada, according to the Sebi website.

“Such letters have been issued to funds whose registration was up for renewal in 2022 and came from non-eligible jurisdictions," said the first person.

This is not the first time such policy changes have upset foreign investors. In April 2018, Sebi issued a beneficial ownership circular which proposed that resident Indians, non-resident Indians, people of Indian origin, and Overseas Citizens of India cannot be beneficial owners of a fund investing in India. This caused an uproar as fund managers said that the focus should be on identifying beneficial owners rather than restricting them. The circular was withdrawn and a new one that focused on identification was issued.

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