SEBI Allows Greater Overseas Investments; Permits 100% Aggregate Contribution In FPIs For NRIs

Markets regulator Securities and Exchange Board of India (SEBI) has allowed up to 100% aggregate contribution by non-resident Indians (NRIs), Overseas Citizens of India (OCIs), Resident Indians in the corpus of FPIs that are based out of International Financial Services Centre (IFSC).

In a circular issued yesterday (June 27), the market regulator said that it is now providing “flexibility of having up  to  100%  aggregate  contribution  by NRIs, OCIs  and  RI individuals in the corpus of FPIs based in International Financial Services Centres (“IFSCs”)  in  India  and  regulated  by  International  Financial  Services  Centres Authority (“IFSCA”).”

It further highlighted that applicants based in IFSCs in India and regulated by IFSCA will need to state intent to have aggregate contribution of NRIs, OCIs and Indian residents of 50% or more in its corpus, to their designated depository participants (DDP). They also need to facilitate PAN cards or declarations of their individual constituents.

Existing FPIs have six months from the date of the circular to submit this declaration. The declaration can only be reviewed during the renewal of registration.

The development comes more than four years after it was first reported that the SEBI could allow more investments from NRIs in under foreign portfolio investors (FPIs). Prior to the development, NRIs were allowed to invest in India through the Reserve Bank of India (RBI) regulated portfolio investment scheme (PIS). The scheme allowed NRIs to invest a maximum of 5% in a listed company.

The SEBI noted that such investors were in possession of INR 3.46 Lakh Cr in the Indian securities market as of March 31, 2023. “Some stakeholders have given feedback that investing through the PIS route restricts NRIs/OCIs from investing in India through overseas pooled structures managed by professional managers, thereby depriving them of the benefits of investment management by overseas professionals,” the regulator said. 

This discrepancy was also highlighted by Finance Minister Nirmala Sitharaman in her 2019 budget speech. “Even though India is the world’s top remittance recipient, NRI investment in Indian capital markets is comparatively less. With a view to provide NRIs with seamless access to Indian equities, I propose to merge the NRI-Portfolio Investment Scheme Route with the Foreign Portfolio Investment Route,” she had said.

While the development effectively streamlines NRI investments, it is pertinent to note that it still caps the investment per FPI. According to a circular issued on June 25, the contribution of a single NRI, OCI, or RI must be less than 25% of the total FPI corpus, and the combined contribution from NRIs, OCIs, and RIs must be less than 50% of the total FPI corpus.

Further, the SEBI also categorically specified NRIs, OCIs and RIs shall not be in control of an application submitted. If the applicant is an ‘offshore fund’ possessing a ‘No Objection Certificate’ has been issued by the Board in terms of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, or is controlled by an Investment Manager which is owned by NRI or OCI or RI, they will need to adhere to two guidelines. 

• Investment Manager must be appropriately regulated in its home jurisdiction and registered with the Board as a non investing FPI
• They must be set up under the Indian laws and appropriately registered with the Board.

The development comes at a time when developments around India’s maiden IFSC based out of Gujarat International Finance Tec (GIFT) City have started picking up steam. 

Bracing for India’s inclusion in global bond indices, a number of investors have made a beeline for these international exchanges. For instance, Chennai-based VC firm Unifi Capital launched two new funds at IFSCA. In March, the Union government and the Asian Development Bank (ADB) inked a $23 Mn loan agreement to spur research and innovation in the fintech space at the City.