Sebi allows NRIs, resident Indians, OCIs to invest in India via FPI route

Indians allowed to invest through LRS route; regulator says KYC compliance for FPIs has to be as per PMLA

The Securities and Exchange Board of India (Sebi) on Friday diluted its controversial circular issued on April 10, which laid down the know-your-client (KYC) and ownership norms for foreign portfolio investors (FPIs).

In a reversal of stance, the market regulator has allowed both resident and non-resident Indians (NRIs), along with overseas citizens of India (OCIs), to invest in Indian markets through the FPI route, subject to certain conditions. The earlier circular virtually barred individuals with India connection from investing or managing a foreign fund.

The regulator, however, reiterated that the KYC requirements for FPIs would have to be in line with the rules under the Prevention of Money Laundering Act (PMLA).

The latest announcement comes after the April 10 circular led to a pushback from overseas investors, particularly those with an India connection.  Certain investors had even approached the prime minister’s office, seeking a rethink. The latest circular incorporates measures prescribed by the former Reserve Bank of India deputy governor H R Khan-led committee earlier this month.

Sebi has said a single NRI, OCI and resident Indian can make contribution of not more than 25 per cent in foreign fund. The aggregate contribution of these investors can be 50 per cent of an FPI. Resident Indians can contribute through the RBI’s liberalised remittance scheme (LRS), which allows an investment of $250,000 per individual in a financial year.

Sebi has said an NRI, OCI or resident Indian should not be in control of FPI.

The regulator has allowed NRIs, OCIs as and locals to act as investment managers (IM) of an FPI, provided they fulfill certain conditions. These include the IM should be “appropriately regulated” in its home jurisdiction and registers itself with Sebi. 

Further, Sebi has allowed all existing FPIs and new applicants a time period of two years to meet the new conditions. 

This is more than just six months of time period recommended by the Khan committee. Also, the regulator has provided 90 days to ensure compliance in case of temporary breach of the conditions. Market players said the new rules will give a boost to FPI flows into India.

“The circular will be welcomed by the resident Indian and NRI fund managers,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells. “Along with domestic structures such as mutual funds and alternative investment funds (AIFs), Indian residents can now invest through global funds under the LRS route.”

“All-in-all this is a welcome move by Sebi as it addresses important irritant to the FPI community,” said Tushar Sachade, partner –financial services, PwC India.

In separate circular, Sebi has said the KYC norms for FPIs will have to as per the PMLA and the FPIs need to maintain a list of beneficial owners. The move is to curb prevent money laundering, said experts.

Those FPIs that issue participatory notes (p-notes) will also have to identify end beneficial owners of p-note subscribers. Sebi has also put in place higher disclosure requirements for so-called category-III and category-II FPIs from “high-risk jurisdiction”.

The regulator has said such investors would be required to do this exercise every year. 

Experts said the timely disclosures would increase the compliance burden for the FPI community. Also, the investment threshold for investors from high-risk jurisdiction will be only 10 per cent.