Sebi's FPI norms may jeopardise billions of dollars from offshore funds

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The Securities and Exchange Board of India’s (Sebi’s) move to club the investment limit for foreign portfolio investors (FPIs) purchasing Indian shares based on the identity of beneficial owners may jeopardise billions of dollars coming into India from offshore funds. 

Global asset managers such as Fidelity, BlackRock, and Templeton run multiple offshore funds that put their money into Indian equities. All of these funds are likely to identify a single beneficial owner (BO) or a senior managing official (SMO) as BO across all funds, said experts. SMOs are designated BOs merely by virtue of their position and do not have any ownership in the foreign portfolio investments. 

Funds that operate through common trustees could also see their investments get clubbed by virtue of having a common BO in the form of a trustee. Japanese funds, for instance, necessarily have to appoint a trustee before going offshore. The Japanese market has eight to 10 large trustees, and each one may be a trustee to 100-200 funds, said experts. 

According to the market regulator’s norms, the purchase of equity shares of each company by a single FPI or an investor group should be less than 10 per cent of the paid-up capital of the company.

Sebi’s April 10 circular states: “In case the same set of BOs are constituents of two or more FPIs and such investors have common BOs of more than 50 per cent in those FPIs, all such FPIs will be treated as forming part of an investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio investor.” 

Custodians report the holdings of FPIs/investor groups to depositories, who monitor the investment limits. FPIs can ascertain whether they form part of an investor group through designated depository participants. 

For instance, if one of Fidelity’s funds buys 4 per cent in TCS and another buys 7 per cent, the individual funds remain well within their limits, but Sebi’s 10 per cent cap will get breached once these investments are clubbed.

What compounds the situation is that most of these funds operate independently and do not share information about the percentage or amount of investment in stocks.

“None of these funds will share any information with each other. Nor will there be any common place to check who has bought what,” said another person.  Experts believe that some offshore funds may prefer to stop their India investments rather than get into a regulatory breach. The FPIs investing in breach of the prescribed limit have to divest their holdings within five trading days from the date of settlement of the trades causing the breach. Alternatively, the investment by such FPIs shall be considered as investment under FDI at the FPI’s discretion. The FPIs cannot hold equity investments in a particular company under both the FPI and FDI route.

The threshold for identification of BOs of FPIs on controlling ownership interest is 25 per cent in case of companies and 15 per cent in case of partnership firms. For high-risk jurisdictions, the threshold is lower at 10 per cent. The April circular had clarified that non-resident Indians, persons of Indian origin, and overseas citizen of India are not eligible to make investments as FPIs. The intent of the circular is to prevent money laundering.