While the intent may be laudable, there are several problems with the approach. FPIs' ownership of Indian equity amounted to about $425 billion on Aug 15, 2018. Out of this, NRIs have invested an estimated $75 billion, via funds where majority shareholders and managers are FPIs. The order implies they are all potential criminals. It may trigger wholesale selling since NRIs cannot operate through the FPI route anymore.
Another big problem is the definition of a "BO" in the Prevention of Money Laundering Act (PMLA). A BO is "a natural person, or persons who, whether acting alone or acting together, have controlling ownership interest in the FPI or control over the FPI." If a BO cannot be directly identified, the senior managing official of the FPI, is assumed to be the BO.
The word ‘control’ is also defined very broadly in PMLA. It includes the right to appoint a majority of directors, or control management or policy decisions, by virtue of shareholding, management rights, shareholders' agreements and/or voting agreements.
Given the definitions, many FPIs would end up with a single officer defined as "BO". In Japanese structures for instance, one person may handle thousands of accounts. This means that the 10 per cent shareholding ownership limits would be clubbed together and apply to that single BO. In that case, if many entities hold positions that, taken together, exceed 10 per cent, the FPI will be forced to divest.
Apart from the Japanese, many global asset management companies like Fidelity, BlackRock, Franklin Templeton, Goldman, etc., run multiple India-focussed funds. A single officer may be considered the BO for all funds from one house. If that's so, the separate funds may be forced to sell, even if those funds are all individually below the 10 per cent limit.
There are also serious privacy concerns given the information demanded in the KYC. This includes address, date of birth, tax residency number, social security number, and passport number, etc., of the BO. This is far more than global disclosure norms, and many FPIs will be uncomfortable about sharing so much information with a country, which doesn't yet have data protection or privacy laws.
must think hard about how these definitions should be reworded. Otherwise, this order will lead to the exit of many legitimate investors when it comes into effect in December.