An avoidable public spat has broken out between the Securities Exchange Board of India (SEBI) and a section of Foreign Portfolio Investors (FPIs), after a recent circular by the regulator giving registered FPIs time until December 31 this year, to provide a list of their beneficial owners and to wind up structures where NRIs, persons of Indian origin (PIOs) or Overseas Citizens of India (OCI), are in the driving seat. Though the latest circular is only a follow-up on an April directive which sought KYC details from foreign investors, AMRI — a lobby group for FPIs — seems to have taken strong exception to it, terming it as vague, opaque and even discriminatory. It has also gone on to warn that $75 billion of FPI investments in India could flow out if SEBI sticks to its guns. SEBI has termed this warning as ‘preposterous and highly irresponsible’.

Admittedly, FPIs investing in India have always indulged in sabre-rattling every time there’s an attempt by policymakers to usher in more transparency into their opaque ownership or operations. This was in evidence during the crackdown on participatory notes and the implementation of General Anti-Avoidance Rules too. FPIs’ indignation over the rules also seem somewhat delayed. NRIs have been barred from registering as FPIs investing in India right from the time SEBI revamped its Foreign Portfolio Investors Regulations in 2014. The main intent behind this rule — to curb round-tripping and laundering of unaccounted money through the FPI route — is irreproachable. What the April circular did was to direct all FPIs to identify their beneficial owners based on a 25 per cent ownership interest for companies, 15 per cent for other entities and 10 per cent for ‘high-risk jurisdictions’. It also clarified that companies that were majority-owned by NRIs or PIOs were not allowed to invest through the FPI route in India and must wind up such structures.

Having said this, this controversy could not have broken out at a worse time for the economy. With a sinking Rupee, tightening global liquidity and sky-rocketing oil prices, India badly needs foreign fund flows at this juncture to bridge its runaway trade deficit. Given this backdrop, SEBI can perhaps rethink the more draconian provisions of this regulation. The move to characterise fund managers as ‘beneficial owners’ of FPIs where their actual owners aren’t identifiable, can be avoided because most offshore funds investing in India are bound to hire locals or persons of Indian origin to oversee their portfolios. Given that ‘high-risk’ jurisdictions haven’t been defined, this categorisation can be dropped. One can also debate why a disclosure-based regime isn’t sufficient to track down cases of round-tripping, and why a blanket ban on NRIs investing as FPIs, is necessary at all. Overall, this controversy clearly underlines the need for regulators to engage in a public consultation process and clearly spell out their rationale, whenever they attempt a substantial overhaul of their ground-rules for the Indian markets.

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