In other words, foreign funds in which an Indian or a group of Indians own 51 per cent cannot be registered as an FPI.
However, in a new circular, Sebi said on Tuesday an Indian origin person cannot own more than15 per cent in a fund, if it is a partnership and 25 per cent if structured as a company.
This spells trouble for many PIO-managed funds, as the fund manager also acts as anchor investor and makes an initial contribution before pooling money from the other investors. Sources say Sebi has encountered several instances where such structures were being used, prompting the regulator to step in.
“The move will hit several funds where a PIO owns in the range of 15 per cent to 49 per cent. Also, there have been instances where an India-domiciled company has acquired an FPI, making it an entity with an Indian beneficial owner,” said a source.
Some say Sebi should exempt genuine situations, such as seed capital, from the new curbs.
“Sebi’s decision will have an adverse impact on a lot of FPIs. Concepts like seed money or general partner contribution are very common while setting up funds, as a fund manager should have his skin in the game. Rather than a blanket ban, the regulator should give exceptions to such cases,” said Tejesh Chitlangi, partner, IC Universal Legal.
To attract more foreign money into Indian markets, the government has given several incentives to FPIs in the past two decades. These funds now enjoy several benefits, including tax exemptions and treaty benefits. Hence, if there are no restrictions on participation of Indians in FPIs, domestic investors can re-route their money through the foreign route to avoid multiple taxes. Also, such a practice could be employed for money laundering.
In recent years, Sebi has been working with other agencies, including the Central Board of Direct Taxes and the Reserve Bank of India to stop such use of the FPI route by Indians.
Earlier, Sebi had made it mandatory for FPIs to reveal the end-beneficiary of participatory note (p-note) subscribers. The move killed the incentive for investors to use indirect participation routes such as p-notes to invest in Indian markets.
Sebi’s probe on several Global Depository Receipts had also revealed many Indian laundered the money through this route. Further, this money was round-tripped back to India with the help of some registered FPIs.