We're not NRIs, Sebi told by PIO fund managers

We're not NRIs, Sebi told by PIO fund managers

Across markets, fund managers who are persons of Indian origin (PIO) are reaching out to Sebi, asking the regulator to differentiate them from nonresident Indians (NRIs) who have been barred from running or controlling foreign portfolio investors (FPIs).

Unlike NRIs who hold Indian passports, PIOs and individuals who have obtained the OCI (or, overseas citizenship of India) card from the Indian government are citizens of other countries.

According to a Sebi rule announced in April 2018, NRIs can longer be‘beneficial owners’ of FPIs (which collectively comprise the largest group of public investors in the Indian stock market). However, in drafting the new rule, the regulator has included PIOs and persons enjoying OCI status in the same group with NRIs.

While the regulation is aimed at curbing fund round-tripping and money laundering, it has impacted several individuals of Indian origin who were born and brought up abroad but are currently either investors, asset managers, or large shareholders in India-dedicated offshore funds or FPI entities trading on Indian exchanges.

"A fund manager who grew up abroad should ideally not face restrictions just because his father or grandfather was born in India or was an Indian. There would be several such offshore fund managers who are PIO or hold OCI cards… Sebi has clubbed NRIs, PIO and OCI. However, under Fema, there is no concept of PIO now though the concept still prevails in income tax law,” said Rajesh H Gandhi, partner, Deloitte.

According to Sebi’s definition, beneficial ownership (BO) in relation to recent restrictions on NRI/PIO/OCI card holders would mean 25% ownership in a company or 15% in a trust or partnership.
Depending on how an FPI is structured, the BO rule would also come into play if the manager of such a fund is an NRI even though the person may not have any investment in the fund; lastly, the threshold (for triggering NRI control in a fund pool) would be at a more stringent level of 10% if the FPI is investing into India from ‘high-risk jurisdictions.’

Fund managers affected by the rule cannot sidestep the regulation by surrendering their OCI card as the status of PIO, which is a deemed one, would prevail. (OCI card holders travelling to India are spared of visa formalities) “Whilst large Indian financial services groups are restructuring offshore operations to eliminate their ownership and control from the offshore manager structures, which interestingly were set-up with Indian regulatory approvals, the more interesting challenge is being faced by PIOs managing several FPIs,” said Tejesh Chitlangi, senior partner at the law firm IC Universal Legal.

FPI Regulations define NRI as per Income Tax Act, 1961which includes PIOs within its wide ambit (unlike the more relevant definition of NRI under the Indian exchange control laws which does not club NRIs with PIOs). “Unfortunately, the way a PIO is widely defined, it even includes foreign citizens whose parents or grandparents were born in India. Sebi should take immediate cognizance of such impracticalities faced by the industry and take corrective measures,” said Chitlangi whose firm is advising a number of affected FPIs and managers.

ET’s email to Sebi, asking if the regulation would be reviewed to exclude PIOs and OCI card holders, went unanswered till the time of going to press.
Partners at law firm Nishith Desai Associates and a senior partner of PwC are expected to meet financeNSE 1.24 % ministry officials on behalf some FPIs and Indian financial services groups this week to draw the government’s attention to the capital market regulation that directs FPIs to fulfil the new ownership norm by October 6.

The Economic Times, New Delhi, 26th June 2018