An expert panel has proposed to India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), that the non-resident Indian (NRI) and portfolio investment scheme (PIS) route be merged with that of foreign portfolio investors (FPIs).
If the recommendation is implemented there would be a uniform regime for all FPIs and, as a result, it would open more investment avenues for NRI investors.
The net effect would also enable Sebi to regulate NRI investments in India; the regime is currently unregulated and does not come under the Sebi umbrella.
Investment benefits
The proposed regulation would additionally remove the requirement for reporting and monitoring for NRIs, but they would now come under Sebi purview.
Benoy Sasi, an international lawyer in the Dubai International Finance Centre (DIFC), said: “NRI investors are set to be subject to a regulation that will force them to invest through fee-based pooling vehicles such as FPIs, mutual funds and alternative investment funds, and not invest directly in India.”
Khalid Abu Zaher, financial and regulatory expert at UAE accounting services company Al Khabir Accounts Records, said the move would benefit NRIs.
“It will work out better for investors because they will have to migrate to FPI and will not be subject to the current limitations on NRI investments under the FPI regulation,” he said.
NRIs are currently allowed to invest in Indian markets directly and indirectly through various routes. NRIs and persons of Indian origin (PIOs) can invest directly in Indian companies under PIS.
They can also buy mutual fund units, invest in private equity funds and use the offshore FPI route, as well as invest in debentures of Indian companies and government securities.
NRI investments are governed under the Foreign Exchange Management Act and must abide by Sebi regulations and the foreign direct investment policy.
Sweeping changes
The expert panel set up by Sebi to review all FPI regulations submitted its interim report to the regulator in September 2018. Its final report is expected to propose sweeping changes to FPI regulations.
Last month, Sebi eased investment rules for NRIs, based on the panel’s recommendations. The committee had suggested that NRIs, overseas citizens of India (OCIs) and resident Indians should be allowed to hold non-controlling stakes in FPIs and there should be no restriction on them managing offshore funds.
NRIs have been allowed to invest as FPIs if a single holding is under 25% and a group holding is less than 50% in a fund.
As part of these reforms, Sebi allowed NRIs and OCIs to invest in Indian markets through the FPI route. That in itself was a reversal in policy stance because the market regulator had previously barred individuals with an Indian connection from investing or managing a foreign fund.
The regulator also allowed NRIs, OCIs and locals to act as investment managers (IMs) of an FPI, with a rider that IMs should be appropriately regulated in their home jurisdiction and be registered with Sebi.
Full oversight
“It is curious that the regulator is seeking to curtail NRI participation through the FPIs even when a direct route is available to them,” said Abu Zaher. “In fact, the earlier practice of segregating NRIs from other foreign investors was to protect their interests and give them an advantage.”
However, Sasi felt that the move would help create a simple and well-regulated market in which Sebi had full oversight of all portfolio investment, instead of being fragmented between the Reserve Bank of India, for NRIs, and Sebi for other FPIs.
