In its latest board meeting, the Securities and Exchange Board of India (Sebi) took steps to improve non-resident Indian (NRI) and overseas citizen of India (OCI) access to Indian equity assets via the foreign portfolio investment (FPI) route. The regulator has hiked the limit of NRI/OCI commitments to the FPI corpus to 100 per cent, provided know-your-customer (KYC) norms are fulfilled and the investments come through the International Financial Services Centre (IFSC). This should enable greater NRI participation in Indian equity while offering transparency. Until now, NRIs could own an aggregate 50 per cent of the corpus of an FPI. Individuals could not hold more than 25 per cent. This was due to concerns about potential round-tripping. But as a result of these restrictions, NRIs are estimated to have contributed only a minuscule Rs 6,700 crore of the approximately Rs 47 trillion worth of Indian equity owned by FPIs. This is certainly low since India receives inward remittances of nearly $100 billion every year.
Under the new relaxed limits, individual NRIs and OCIs may directly invest up to 100 per cent of the FPI corpus, or they may do so indirectly, investing through firms or vehicles that are majority-controlled by NRIs and OCIs. However, the FPIs should provide the permanent account number (PAN) and other KYC details of every investor to depositories. If PAN and KYC are not furnished, the enhanced limits can still apply but only to FPIs where the investment manager is an asset management company of a Sebi-registered mutual fund, and sponsored by a Reserve Bank of India-regulated bank, or its IFSC-based subsidiary or branch. This retains a measure of regulatory surveillance. Stricter disclosure rules apply to FPIs with significant holdings in a single Indian group or large overall holdings in Indian equities. Funds with over 33 per cent of their equity assets under management in one Indian group company need to provide detailed investor information and there is a cap of 35 per cent total investment in a given group.
Similar detailed disclosures will be required if the fund, along with its investor group, holds a total of more than Rs 25,000 crore in Indian equities. This is to guard against a scenario where promoters invest clandestinely in their own group companies, using overseas vehicles to breach the limit of 75 per cent shareholding. By simplifying regulations for NRIs and raising the limits, while boosting transparency, these changes are expected to increase foreign investment and improve NRI and OCI commitment to Indian equity. But NRIs do invest considerably more via Indian mutual funds than through the FPI route and new KYC norms may present a hurdle. In FY24 (until February 24) NRIs had invested $12 billion equivalent via Indian mutual funds.
But the new KYC norms from Sebi, which demand compulsory Aadhaar verification, are a barrier for NRIs and OCIs. Many NRIs, including those who are already invested in MFs, don’t possess Aadhaar. Even those who have Aadhaar may not be able to validate their status if they don’t have active Indian mobile numbers. While the intention of the regulator is to increase transparency, it must also consider practical difficulties that investors might face in fulfilling its requirements. Tapping the savings of Indians living abroad can provide a stable source of financing and improve India’s growth prospects.
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