Higher limit in FPIs: NRI investments in Gift City off to a slow start

The Securities and Exchange Board of India has permitted 100 per cent contribution from non-resident Indians (NRIs) and overseas citizens of India (OCIs) in the corpus of foreign portfolio investors (FPIs) based out of Gujarat International Finance Tec-City (GIFT City), the country’s international financial services centre (IFSC). However, the Indian diaspora is yet to fully warm up to this new route.

The regulator allowed this route to enhance the fund ecosystem at GIFT City and attract genuine investments from overseas Indians. Nonetheless, rules require the submission of permanent account number (PAN) for all NRIs and OCIs, along with details of their economic interest in the FPI.

Industry participants note that while there is interest from NRIs and investors, some are reluctant to provide PAN and know-your-customer (KYC) details.

A custodian familiar with the developments said that some potential investors believe they will face increased scrutiny through this route.

An official from the International Financial Services Centres Authority (IFSCA), the unified regulator at GIFT City, said that the regulator has provided a separate form for investors who prefer not to share their PAN details. However, other identification details, such as social security numbers, are still required.

“The relaxation allowing up to 100 per cent NRI investment in FPIs registered with the IFSCA is a significant initiative and is expected to attract increased investments. While the desired response may take some time, proper safeguards mustn't be overlooked. Information regarding the identity of the constituents and their economic interests in the FPI is vital for ensuring the stability and integrity of the financial markets,” said Saurabh Tiwari, partner at DSK Legal.

Such FPIs will also need to adhere to the granular disclosure norms regarding economic interest and ultimate ownership to prevent violations of minimum public shareholding norms.

Emailed queries to IFSCA regarding KYC issues did not receive a response.

Several domestic fund houses have established alternative investment funds in GIFT City to tap into NRI investments from the domestic market.

“We are at our marketing stage and will try to be up & running by the end of this year. We are targeting to largely have NRI/OCI investors. Till now, our engagements have been good with the potential investors, and we will be complying with all KYC norms. We are targeting $100 million,” said Somnath Mukherjee, CIO & Senior Managing Partner, ASK Private Wealth, a Blackstone-backed firm which has launched a fund in IFSC focusing on NRI and OCI investors. 

Experts stress the need to further refine some rules.

Industry participants have suggested amendments to the regulator concerning qualification, experience, and substance, with a draft norm expected to address these requirements.

Experts also noted that some FPIs with NRI investors are considering re-domiciling from Mauritius and Singapore to India, with the GIFT City authority looking to facilitate this process.

New registrations might take six months to a year, as FPIs registered in GIFT City must comply with granular disclosure norms.

“If higher contributions are permitted from a single NRI, we could see increased registrations,” said a market participant.

Under the current rules, a single NRI/OCI/resident Indian’s contribution is capped at less than 25 per cent of the FPI’s total corpus, while the aggregate contribution is restricted to below 50 per cent.

“One challenge FPIs face in setting up in GIFT City is that they must be established as funds rather than simple holding companies. FPIs also need to have a principal officer and a compliance officer, both of whom must be full-time employees meeting education and experience qualifications and working from the FPI’s office in GIFT City. Many overseas managers are finding it challenging to meet these requirements,” said Radhika Parikh, head of GIFT City Office at Nishith Desai Associates.

Currently, there are around 63 FPIs registered in the IFSC. Custodians and market participants indicate that the IFSCA is considering further easing the process.

“An informal submission has been made to the IFSCA. A draft norm is expected to ease the minimum qualification and experience mandates, as well as the requirement for full-time employees,” said a source familiar with the developments.


Easing the process

 Sebi had allowed 100% contribution from NRIs in FPIs registered in IFSC

 Market participants expect higher NRI participation by next financial year

 Many NRIs investing through AIFs registered at the financial hub

 Overall, 63 FPIs and 110 fund management entities registered in GIFT-IFSC, as of August

 More relaxations sought by industry players to attract more registrations

 Relief on minimum qualification, experience submitted to the regulator