Sebi refutes MSCI's claim of India being a 'restrictive' market

The Securities and Exchange Board of India (Sebi) has refuted global index provider MSCI’s claim of India being a “restrictive” market for offshore investors.

MSCI had, in May, put India on notice for limiting access to investors using offshore platforms. The move came after domestic exchanges snapped licensing and data-sharing arrangements with global bourses to put an end to offshore trading in domestic products.

According to sources, the market regulator has responded to a note floated by MSCI, emphasising upon the initiatives taken by Sebi and the government to improve ease of doing business for overseas investors.

Investors tracking MSCI indices use the Singapore Exchange (SGX) platform to take exposure to Indian derivatives. Unilateral termination of the data-sharing agreements spooked the clientele of MSCI, prompting the index provider to revisit its stance on India. India currently holds a weight of 8.61 per cent in the MSCI EM Index, the fourth largest after China, South Korea and Taiwan. A cut in India’s weightage could trigger sharp outflows from foreign portfolio investors (FPIs).

“The breadth of restrictions announced by Indian exchanges is unprecedented in any equity market in the MSCI Emerging Markets Index series. MSCI strongly suggests Indian exchanges and their regulator, Sebi, to reconsider this unprecedented anti-competitive action before it leads to any unnecessary disruptions in trading or a potential change in the market classification of the Indian market in the MSCI Indexes,” according to the MSCI note.

MSCI also said it would welcome any suggestions from Indian exchanges and other stakeholders in this regard.

Besides Sebi, domestic exchanges, too, had sent an official response to MSCI on the issue, sources said.

An email sent to Sebi seeking response remained unanswered.

“India is far from being a restrictive market for FPIs. We have a robust regulatory framework and all major global funds are present in India,” a regulatory source said.

According to experts, the regulatory framework of any country could be determined based on two aspects — entry norms and operational norms. In terms of entry norms, India was fairly placed. The average time for obtaining an FPI licence and commencing trading has come down to two weeks from three months in the last few years. This timeline is on par with other developing markets.

“Indian FPI regulations are very competitive. The market regulator has taken several steps to improve ease of doing business,” according to Sandeep Parekh, founder, Finsec Law Advisors.

In recent years, both the government and Sebi have been proactive in addressing the concerns of FPIs. For instance, the government’s decision in 2014 to impose minimum alternate tax (MAT) spooked several FPIs since it amounted to double taxation. The government soon left FPIs out of its purview. Similarly, FPIs had raised concerns about the provisions of indirect transfer tax introduced in 2016. The government had exempted category-I and -II FPIs from its ambit. Recently, the Reserve Bank of India (RBI) sweetened the norms after some of the FPIs expressed concerns.

However, lack of any indirect participation is a key factor, according to experts. Most developing markets, including South Korea, Taiwan and South Africa allow ‘omnibus’ structures for FPIs.  Omnibus is a framework where a broker trades on behalf of his clients through his account and maintains segregated portfolio for each client.

“Omnibus structures are not very favourably looked upon by Indian regulators due to concerns about money laundering and tax evasion. However, Sebi has eased direct participation rules significantly,” said Tejesh Chitlangi, partner, IC Universal legal.

For a long time, participatory notes (p-notes) allowed offshore investors to purchase Indian equities without going through Sebi registrations; the route has become unviable in the last three years due to regulatory tightening. A lot of foreign funds also used offshore platforms such as SGX, Chicago Mercantile Exchange (CME) to take exposure to Indian derivatives. However, snapping of data ties by Indian exchanges closed that route. The market regulator recently permitted ‘Omnibus’ structures from International Financial Services Centre (IFSC), Gift City. However, FPIs have not been using the route due to lack of liquidity in the platform. Further, the platform allows FPIs to take derivative exposure only, and not cash market exposure.

Battle of the exchanges 

What is MSCI: It is the largest index provider globally. Assets worth $12.4 trillion are benchmarked against the MSCI indices

What is its concern: Indian exchanges terminating their data sharing pacts with foreign bourses impacts its clients adversely. It construes this unilateral action as restrictive as well as anti-competitive
What could MSCI do: Cut India's weight if it finds overseas investors are not able to access or hedge their exposures to India freely

Possible impact of MSCI weight cut on India: The market could see a sharp sell-off from FPIs tracking MSCI indices, as they would realign their portfolios according to the MSCI index weight

Why Indian exchanges terminated data sharing pacts: To prevent export of Indian markets to jurisdictions such as Singapore

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