Background
In a move to boost investments in Indian capital markets, the Securities and Exchange Board of India ("SEBI") in its recent circular dated June 27, 2024 amended the SEBI (Foreign Portfolio Investors) Regulations, 2019 ("FPI Regulations, 2019") vide the SEBI (Foreign Portfolio Investors) Second Amendment Regulations, 2024 ("Amendment Regulations"). The Amendment Regulations provide for increased participation (upto 100% by Non-Resident Indians ("NRIs"), Overseas Citizens of India ("OCIs") and Resident Indian ("RI") individuals (NRIs, OCIs and RIs, together read as "Permitted Investors")) in the corpus of Foreign Portfolio Investors ("FPIs") based out of the International Financial Services Centres ("IFSCs") in India. A consultation paper inviting comments from the public was also released by SEBI on this subject in August last year following which a board meeting on April 30, 2024 discussed and approved the proposal to allow FPIs based in IFSCs and GIFT City to permit up to 100% (one hundred per cent) contributions from Permitted Investors.
FPI Regulations, 2019 read with the Master Circular for Foreign Portfolio Investors, Designated Depository Participants ("DDPs") and Eligible Foreign Investors dated December 19, 2022, regulate and specify the threshold for the aggregate contribution by NRIs and OCIs, allowing them to remain constituents of pooled investment funds investing under the portfolio investment regime however they could not be beneficial owners of FPIs.
Although India continues to remain the leading recipient of foreign remittance, participation by NRIs and OCIs in Indian capital markets has remained significantly low owing to the aforementioned investment restrictions in FPIs. Also, the burden of monitoring the Permitted Investors' participation and the risk associated with forced paring down of their holding in the FPI, especially on account of passive increase in their holdings due to redemption requests from other investors discouraged FPIs from accepting investments from Permitted Investors, resulting in lesser flow of funds from NRIs and OCIs in Indian capital markets.
Amendment Regulations
The erstwhile legal framework had an individual and aggregate cap on Permitted Investors. While the contribution of a single Permitted Investor was capped at less than 25% (twenty five per cent) of the total corpus of the FPI, the aggregate contribution was restricted to below 50% (fifty per cent) of the FPI corpus. Furthermore, the Permitted Investors were barred from exercising control over the FPI, subject to certain conditions. The Amendment Regulations provide flexibility of having up to 100% (hundred per cent) aggregate contribution by Permitted Investors in the corpus of FPIs based in IFSCs in India. The Amendment Regulations require FPI applicants to declare their intention to have at least 50% (fifty per cent) of their corpus contributed by Permitted Investors at the time of registration. Existing FPIs have 6 (six) months to comply with this requirement from the date of the circular, with the declaration subject to review during registration renewal.
To enable such investments by the Permitted Investors, Permanent Account Number ("PAN") cards of all such Permitted Investors are to be submitted with the respective DDP. In case the individual does not have a PAN, then a declaration to the effect, along with the copies of prescribed identity documents, viz., Indian passport, OCI Card, Aadhaar Card, etc. ("ID Documents") ought to be furnished to the DDP by the FPI.
Alternatively, IFSC based FPIs have the option of not providing any of the above-mentioned documentation if they fulfil the following conditions:
- The contributions are pooled in a single FPI vehicle, with no side vehicles;
- The FPI should have a common portfolio, with the investors having pari passu and pro rata rights in the FPI;
- The FPI should have at least 20 (twenty) investors and none of the investors should hold more than 25% (twenty five per cent) stake in its corpus;
- The FPI should not invest more than 20% (twenty per cent) of its corpus in the equity shares of a single Indian investee company;
- Any passive breach of these conditions shall be rectified by the Investment Manager/Fund Manager within 3 (three) months of registration; and
- The Investment Manager/Fund Manager shall be independent an asset management company of a SEBI registered mutual fund, sponsored by an RBI regulated bank or its IFSC based subsidiary/branch.
Analysis
The recent change is expected to encourage greater participation of NRIs and OCIs in the Indian securities markets, addressing long-standing demands to attract more investments from these groups. The involvement of Permitted Investors has been a contentious issue as the proponents argue that they should have an equal access to investment opportunities, while opponents cite concerns about unregulated funds and market manipulation. However, it is widely agreed that allowing NRIs/OCIs to invest in the Indian market would boost the already thriving market.
This change is expected to streamline investment processes and invite more substantial financial inflows from overseas Indians into the domestic market, while they offer benefits to NRIs/OCIs, they also come with costs and limitations. For instance, FPIs in the Gujarat International Finance Tec-City ("GIFT") IFSC must obtain additional registrations and licenses.
Another limitation is that the Amendment Regulations require Permitted Investors to submit PAN/ID documents if they are invested in an FPI through an entity. This applies if the entity is majority-owned/controlled by them. However, it would be more effective to assess ownership/control at the FPI level, not the feeder level. Additionally, it is unclear how to track and disclose minor investments through multiple feeder entities or listed feeder entities. All in all, the Amendment Regulations promotes financial inclusivity by expanding the investor base and the government acknowledges the potential of NRIs and OCIs in attracting foreign investment to Indian markets, and these amendments reflect this recognition.
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