Sebi Panel Likely to Suggest Bringing on Par FPI, FDI Caps

A Securities and Exchange Board of India (Sebi) panel headed by former Reserve Bank of India deputy governor HR Khan is set to recommend liberalisation of investment caps for foreign portfolio investors. At present, foreigners can own up to 24% in a listed Indian company with any further increase requiring approval from the firm’s board. The panel is considering to propose removal of the 24% restriction and making the different sectoral caps under foreign direct investment (FDI) rules as the new ceiling. This will give companies room to raise money from foreign investors while improving India’s weightage on the MSCI Index.

The committee is expected to submit its recommendations to Sebi in April. “Basically, we are only flipping around the current regime that requires each company to separately pass resolutions to increase FPI limits up to the sectoral caps to one where less-prepared companies can resolve to reduce the FPI limits from the sectoral caps to the level they choose,” said Manish Chokhani, director of Enam Holdings. FDI caps in different sectors vary from 49% to 100%. The Reserve Bank of India was initially opposed to the proposal as it felt that companies may become vulnerable to hostile takeovers. But the committee has been able to assuage RBI’s concerns, said a person familiar with the development.

Step to Raise India’s Free Float, Attract Foreign Flows

“The committee thinks if a company is not comfortable, it can pass a board resolution to bring down such caps,” the person said. Chokhani said the step will increase India’s free float and attract greater foreign flows. “We compete for foreign capital with countries like China for increased weightage in free float-based global indices. Setting the sectoral cap percentage as the default available limit for FPIs is a desirable move,” he said. MSCI calculates weight based on the free float available for investments by FPIs.

India’s weightage on MSCI indices is set to shrink in May after China’s A Class shares are included, a move that could lead to sharp outflows from the country. If the Khan panel’s proposals are cleared by Sebi before May, selling by FPIs owing to India’s reduced weightage could be averted to a large extent. The panel is also likely to propose harmonisation of rules for FPI and FDI when it comes to usage of funds.

Existing rules don’t allow investors to use FPI money for FDI investments. Every time an investor makes an FDI investment, he has to get money from abroad. Several big investors have asked regulators to allow them to use existing FPI money for FDI investments. The Khan panel was earlier in favour of a merger between FPI and FDI routes, but the RBI opposed it. “The central bank feels they are different routes. The structural purpose and capital purpose of FPI and FDI routes are different,” said the person quoted earlier. Unlike India, most countries don’t differentiate between foreign investment routes, legal experts said.

“The RBI is fine with harmonisation of rules for usage of funds because it involves the same set of investors,” said the person quoted earlier. The panel will also propose a fast-track registration process for certain types of foreign investors. There would be reduced documentation for FPIs that are already regulated and those that come from FATF (Financial Action Task Force) jurisdictions. FPIs coming in through global custodian banks will also be given easier access. The committee is likely to propose several changes to the FPI regulations. It would also propose uniform know-your-client guidelines for FPI, FDI and FVCI (foreign venture capital investors).

The Economincs Times, 27th March 2019

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