Foreign portfolio investors (FPIs) — the largest investor group in the Indian stock market — want the regulator to make life easier for them. At a meeting with the Sebi chairman this week, about 30 officials and custodians of some of the large offshore funds appealed to the stock market regulator to do away with the rule that requires most offshore funds to be broad-based — having at least 20 investors with each holding not more than 49%. They have also voiced their concern about the practice where copies of passport, social security numbers, and other national identification documents such driver’s licence of senior management officials and directors of many foreign funds are shared with brokers and intermediaries.
The regulator has typically preferred ‘broad-based’ funds to minimise round-tripping of money and trades where FPI vehicles are used by a small club of investors to manipulate stock price. “However, it was argued that since Sebi has directed funds to disclose their ultimate beneficial owners (UBOs), the regulator would have all relevant information about the investors in a fund. So, why do funds still have to be broad-based?”, a person familiar with the discussion told ET. The representation from foreign funds come amid volatile stock prices. FPIs have sold equities and bonds worth more than Rs 1 lakh crore since April. However, the foreign fund managers were net buyers in November — having purchased a total of about Rs 11,000 crore in bonds and equities.
More than 70% of the FPIs — registered as Category-II funds — have to fulfil the broad-based norm while the KYC rule for sharing personal information of senior fund officials apply to Category-II funds incorporated in ‘high-risk jurisdictions’ and Category-III FPIs — comprising hedge funds, family offices and non-resident individuals. The list of high-cost jurisdictions vary among custodian banks based on their respective internal parameters. (These rules are not applicable to Category-I FPIs which are typically government-owned institutions and arms of multilateral agencies.) “Some FPIs have been requesting for deletion of the broad based criteria since this is difficult to achieve specially in the initial years when the fund does not have a track record and it also creates an additional compliance burden due to the various conditions surrounding the broad based requirement. The broad based criteria helps the Government to ensure that funds which get the benefit of relaxed KYC as a Category-II FPI have a large investor base and are not private investments,” said Rajesh Gandhi of Deloitte India.
According to Tejesh Chitlangi, senior partner at the law firm IC Universal Legal, “The broad base criteria from regulatory perspective may continue to stay relevant since it’s an important risk diversification tool for a Category II FPI which ensures that all the monies are not received from concentrated investor accounts.”
FPIs Meet Sebi Chairman
“However, from a KYC perspective,” said Chitlangi, “the requirement to furnish certain personal data under the current Indian laws is stringent which may at times get sensitive whilst seeking such information from foreign parties, particularly wherein such similar practices are not in sync with their own domestic data privacy laws. But, each jurisdiction has a right to impose its own norms in a manner deemed appropriate and should not be viewed upon unfavourably as long as confidentiality norms are in place.” Such personal official of senior management members of funds are uploaded with the KYC Registration Agency which brokers can easily access. The overseas funds want the information to be shared only with custodians and not shared with all intermediaries which may not be in a position to keep them confidential.
At the meeting the funds also asked Sebi to consider scrapping the rule under which an FPI has to bring in a margin of about 3% for purchase of government bonds -- a requirement that does not exist for equity investment and take up with the Reserve Bank of India for lifting the curbs on FPI investments in corporate bonds. Under the RBI rules, an FPI cannot buy the entire bond issue by a corporate and must diversify portfolio (by March) by not holding more than 20% of bonds issued by a corporate; also not more than 10% of the investment of an FPI can be in short-term debt instruments (which mature in less than a year). “They also told Sebi that most FPIs would prefer paying a higher securities transaction tax than capital gains tax and would like the lowered withholding tax of 5% (on interest earnings on bonds) to continue. The regulator would examine the suggestions and give its recommendations to the finance ministry,” said a source.
The Economics Times, 07th December 2018
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