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 in a circular titled “Easing of access norms for investment by foreign portfolio investors”. Experts say the new measure, which resembles the participatory note (p-note) framework, could be a game changer. Also, this route will provide more flexibility to investors compared to p-notes, as they will be able to take unhedged exposure to Indian derivatives market. Sebi’s latest move is a departure from the regulator’s efforts in the past few years to encourage direct participation. All big-ticket p-note 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 p-note route. “Allowing private banks to invest on behalf of their clients has been a long-standing industry demand. In the current scenario p-note 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 through a bank,” said Rajesh Gandhi, partner, Deloitte India. Private banks fall under Category-II 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 Category-III FPIs, could invest through banks and avail of beneficial treatment. Private banks are a major class of institutional investors worldwide because of their wealth management arms, which cater for institutions, family trusts, and individual investors. Mid- and small-sized investors, whose exposure to the Indian markets is currently minimal, could prefer this route. “Private banks manage a significant portion of global wealth. Because of the earlier restriction, a lot 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 p-note subscribers from taking any unhedged positions in the futures market last year. Following concerns about money laundering through p-notes, expressed by the Supreme Court-appointed special investigation team, it had tightened ‘know your customer’ norms for p-notes in 2016.
P-note issuers were asked to follow Indian anti-money 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 long-term capital gains tax and enacting General Anti-Avoidance 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.