Ease of investing

FPI panel suggestions make eminent sense

The Securities and Exchange Board of India (Sebi) on Friday asked for comments on the recommendations made by a working group that reviewed the foreign portfolio investment (FPI) regulations. The group, under the chairmanship of former Reserve Bank of India deputy governor H R Khan, has suggested about 50 changes, which, if implemented, will lead to a radical makeover of the current FPI regime and reduce the regulatory burden substantially. The salient changes include increasing FPI limits in listed companies and propose to reduce the paperwork for registration of “well-regulated” entities, overseas insurance companies and pension funds. FPIs will also be allowed to invest in unlisted businesses headed for an initial public offering. The report has further suggested laying down clear regulations for FPIs to invest in real estate investment trusts (Reits), infrastructure investment trusts (InvITs), and alternative investment funds (AIFs), instead of the current practice of clearing such investments on a case-by-case basis.
 
These appear to be pragmatic and progressive suggestions, and, if properly implemented, should clear the way for an increase in FPI flows. Of course, the implementation will require detailed discussions with the central bank and the tax authorities, which have legitimate concerns about money-laundering and round-tripping. FPIs wishing to invest in Indian assets are often constrained by the 10 per cent limit in listed stocks, which often leads to a limited floating stock. Increasing the limit now requires a resolution from the company’s board and shareholders. This is an onerous process, and FPIs are not allowed to invest in unlisted firms.
 
The sectoral limits are intended to prevent foreign entities from exercising control. But this concern is misplaced because FPIs are passive investors. So far as unlisted start-ups are concerned, the recommendations will help reduce the paperwork. If an FPI wishes to invest in an unlisted start-up now, it has to first open an alternative foreign direct investment (FDI) account. At the same time, there is a shortage of available capital for start-ups. Cutting down red tape allows FPIs to invest in unlisted firms, while making a larger pool of capital available for start-ups. Similarly, in the cases of REITs, AIFs and InvITs, a clear-cut set of regulations will remove red tape and the ambiguities involved in entering these instruments.
 
It has been recommended that overseas pension funds be treated as “Category I” investors, along with sovereign wealth funds, since these entities are highly regulated in home jurisdictions and their sources of funding are clear. Category II investors include most broad-based FPIs, with over 20 investors. Category III consists of hedge funds and “narrow-based” insurance funds, which need high compliance. Insurance funds, which are also highly regulated, should be moved to Category II. It’s also recommended that other FPIs in Category III be allowed to migrate to Category II if they are based in low-risk jurisdictions, and that the definition of “broad-based” be founded on economic ownership, meaning the stakes of major investors rather than the number of investors be considered.
 
The working group has invited comments from the public till June 14, and the fe­ed­back is expected to be generally positive. If the recommendations are acce­p­t­e­d, they would make a significant difference to the ease of investing in Indian assets.