Chinese investment into Indian markets amid meltdown draws Sebi's attention

The issue surfaced after the shareholding pattern disclosed by HDFC showed the People's Bank of China had hiked its stake in the mortgage lender during the March quarter

Top officials of the Securities and Exchange Board of India (Sebi) met earlier this week to discuss two key issues — the acquisition of shares by Chinese investment firms amid the market meltdown in March and liquidity problems concerning mutual funds (MFs) — said people with knowledge of the development.

The issue of acquisition by Chinese firms surfaced after the shareholding pattern disclosed by HDFC showed the People’s Bank of China (PBoC) had hiked its stake in the mortgage lender during the March quarter. While such acquisitions are routine, it raised some concerns about China looking to tighten its grip on the Indian markets, taking advantage of the fall in stock prices. 

The meeting was attended by Sebi Chairman Ajay Tyagi, whole-time members, and select executive directors. At the meeting, the issue of the liquidity crunch at debt MFs was also discussed. Several fund houses have resorted to borrowing from the market amid huge redemption pressure. Also, there are concerns around repayments of bonds and commercial papers, which are due to mature over the next few weeks, given the halt in business activity because of the lockdown.

 

 

“Top officials of Sebi met on Monday to discuss equity purchases by Chinese foreign portfolio investors (FPIs) and issues faced by debt MFs. The purchases by China-based firms are routine in nature. It doesn’t warrant any red flag. However, the MF issue is a tricky area and would require intra-regulatory coordination,” said a source.

Sources said the issue of Chinese acquisition was taken up for discussion after the central government asked Sebi to up its guard and keep strict vigilance on such investments. The move comes at a time when the investment legroom for overseas investors has expanded, following the government decision to treat sectoral limit as FPI limit.

Market players said the domicile of FPIs doesn’t matter as long as they follow the investment framework.  “The Indian capital market is a free market and regulations are equal for all the foreign investors, whether they are from China or any other foreign nation. Foreign investors would come if they find valuations attractive,” said Alok Churiwala, a Mumbai-based broker.

However, custodians that empanel FPIs said the regulator has asked for greater scrutiny and special approvals for new investors domiciled in neighbouring countries.

Meanwhile, Sebi officials discussed several inputs with respect to the liquidity issue of debt MFs scheme. The regulator is of view that sufficient measures have been taken to tackle the liquidity issue. If the crisis persists, fund houses should renegotiate its terms with investors. 

The regulator also is of the view that the Reserve Bank of India could give a separate line of credit if the situation worsened. The RBI, at least on two occasions in 2008 and in 2013, had created a window for MFs to borrow to meet liquidity requirements. The issue has come in the wake of rising redemption pressure, lack of activity in the bond market, and fears of non-payment of dues by corporates because of shutdown in business activity.