SEBI opens new door for overseas investors

SEBI opens new door for overseas investors

The Securities and Exchange Board of India (Sebi) has opened up the Indian capital markets to clients of global private banks, which can invest in stocks without having to go through registration or compliance requirements.

Until now, foreign banks were allowed to do propriety trades only.However, now they have been allowed to invest in domestic securities on behalf of their clients.Sebi announced the move last week inacircular titledEasing of access norms for investment by foreign portfolio investors.

Experts say the new measure, which resembles the participatory note (pnote) framework, could beagame changer.Also, this route will provide more flexibility to investors compared to pnotes, as they will be able to take unhedged exposure to Indian derivatives market.

Sebi´s latest move isadeparture from the regulator´s efforts in the past few years to encourage direct participation.All bigticket pnote issuing entities are owned by banks such as Citi, JPMorgan, BNP Paribas, and Credit Suisse.These banks can now direct their clients to invest through their wealth management arms rather than taking the pnote route.

“Allowing private banks to invest on behalf of their clients has beenalongstanding industry demand.In the current scenario pnote subscribers could migrate to this route and trade freely in the Indian derivatives market.The compliance requirement is also expected to be less if an investor comes throughabank,” said Rajesh Gandhi, partner, Deloitte India.

Private banks fall under CategoryII foreign portfolio investors (FPIs) and face fewer restrictions and no withholding tax because they are considered “appropriately regulated” entities.Experts say family trusts and wealthy investors, who come under CategoryIII FPIs, could invest through banks and avail of beneficial treatment.

Private banks areamajor class of institutional investors worldwide because of their wealth management arms, which cater for institutions, family trusts, and individual investors.Midand smallsized investors, whose exposure to the Indian markets is currently minimal, could prefer this route.

“Private banks manageasignificant portion of global wealth.Because of the earlier restriction,alot of investors went to other countries even though they had an appetite for India,” said Suresh Swamy, partner, PwC India.Citing excessive speculative trading in the derivatives market, Sebi banned pnote subscribers from taking any unhedged positions in the futures market last year.

Following concerns about money laundering through pnotes, expressed by the Supreme Courtappointed special investigation team, it had tightened ´know your customer´ norms for pnotes in 2016.Pnote issuers were asked to follow Indian antimoney laundering laws.However, the circular on private banks doesn´t have any such provisions, meaning less compliance burden.There are two broad conditions these banks should meet.One, they should not have secrecy arrangements with the investors.

Two, the banks should know who the end beneficiary of the account is, and Sebi has the right to know about it.Overseas funds have been spooked by several policy measures taken by the government in the past few years.Experts say moves such as the reintroduction of the longterm capital gains tax and enacting General AntiAvoidance Rules (Gaar) have affected investor sentiment.

They say these decisions have reduced the attractiveness of India as an investment destination.FPIs would welcome Sebi´s circular, experts said

Market Sheet

1.Sebi permits foreign investors to invest in Indian markets through private banks

2.Investors using this route will not be required to register directly with Sebi

3.This bears resemblance to the pnote framework |

4.Also, investors coming through private banks will be able to take unhedged positions in derivatives, which pnote users are not allowed to do

5.Foreign individuals and family trusts under CategoryIII FPIs can also avail of this route

The Business Standard, New Delhi, 19th February 2018

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