The Securities and Exchange Board of India (Sebi) on Wednesday relaxed the regulatory and compliance framework for foreign portfolio investors (FPIs). The market regulator also gave assurances that it would rationalise the norms for issuing participatory notes, thus making it convenient for FPIs
to service clients favouring those instruments. These measures should help reverse negative sentiment among FPIs
and facilitate their re-entry into the Indian stock market, where they have been heavy sellers since the Budget. In addition, the market regulator has also announced a relaxation in the debt: equity ratio required for buybacks in listed companies, with financial subsidiaries. Further, Sebi
has tightened the regulations for credit-rating agencies and their clients, asking for an explicit agreement to provide full details to the rating agency on existing and future borrowings. It has also proposed an “informant mechanism” to gather timely evidence in insider-trading cases.
The new FPI norms
broadly follow the recommendations of the H R Khan Committee. There is a lot of simplification, with 57 pertinent circulars being compressed into a single circular. Sebi
will now classify FPIs
into two categories instead of three earlier. The classification, the necessary know your customer norms, and other compliances will depend on how the entity is regulated in its “home market”. The earlier emphasis on categorising FPIs as “broad-based” only if they had 20 or more investors will be removed. Offshore funds floated by Indian asset management companies will be permitted to register as FPIs for the purpose of investing in India. The central banks of other countries will be permitted to register as FPIs even if they are not members of the Bank of International Settlements. Since 2017, issuing P-Notes had been restricted purely for the purpose of hedging. This restriction will be removed, making it easier for clients who prefer these instruments.
Although these simplifications make it considerably easier for FPIs to register and trade, the finance ministry will also have to step in if sentiment is to improve. Certain FPIs such as pension funds are mandated to operate only as trusts due to regulations in their home bases. The hike in the surcharge on income above a level in the latest Budget impacts all such FPIs set up as trusts. The FPIs have sold over $3 billion worth of Indian equity since that change was announced. Removing the surcharge could go a long way to stem the selling pressure, although many investors are also pessimistic about the slowdown in the Indian economy.
The change in the buyback norms will benefit companies that own non-banking financial companies (NBFCs) and housing finance subsidiaries. These financial subsidiaries may have standalone debt:equity ratios of up to 6:1. Under the earlier norms, the consolidated entity’s debt:equity ratio had to be 2:1 or lower, after any buyback. The amendment dilutes that by mandating that the standalone entity’s debt:equity ratio must be 2:1 or lower, and the consolidated debt:equity ratio would also have to be 2:1 or lower. The consolidated ratio would, however, be calculated after excluding financial subsidiaries. These changes taken together should make life much simpler for FPIs and for corporates considering buybacks. Now it’s up to the finance ministry to follow through on the tax front.