100% participation permitted for NRIs, OCIs and Resident individuals Indians in FPIs based out of IFSCs in India

When the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 was in vogue, Non-Resident Indians (NRIs) were not allowed to register as Foreign Institutional Investors (FIIs) or sub – accounts. Further, companies in which NRIs had a majority stake were also not allowed to make investments as an FII. However, funds having NRIs as constituents (investors) were not prohibited from obtaining registration as an FII or as a sub – account. In addition, companies promoted by NRIs were allowed to be registered as non – investing FIIs for managing the funds of other FIIs and sub – accounts.

When the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (SEBI FPI Regulations) was introduced, the same position continued. NRIs and Overseas Citizens of India (OCIs)  were not eligible to be registered as Foreign  Portfolio  Investors  (FPI)  , though they could be investors in FPIs. Under the SEBI FPI Regulations, entities with a majority stake held by NRIs could register as FPIs, to serve as investment managers for other FPIs. On April 10, 2018, SEBI issued a circular that, inter alia, clarified that Resident Indian individuals (RIIs), NRIs and OCIs cannot be Beneficial Owners of FPIs. It was however also clarified that if an FPI is an investment manager of other FPIs and is a non- investing entity, it may be promoted by NRIs and OCIs.

On September 21, 2018, SEBI issued a circular which set out the following guidelines for NRIs/ OCIs to be constituents of an FPI:

• the contribution of a single NRI or OCI or RIIs shall be below 25% of the total contribution in the corpus of the FPI;
• the aggregate contribution of NRIs, OCIs and RIIs shall be below 50% of the total contribution in the corpus of the FPI; and
• NRIs, OCIs, and RIIs are prohibited from controlling an FPI, except under the following conditions:

– (i) if the FPI is an ‘offshore fund’ that has received a ‘No Objection Certificate’ from SEBI as per the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, or (ii) if the FPI is controlled by an investment manager who is owned and/or controlled by NRIs, OCIs, or RIIs if the following conditions are satisfied: such investment manager is appropriately regulated in its home jurisdiction and registered with SEBI as a non-investing FPI, or
– such investment manager is incorporated or setup under the Indian laws and appropriately registered with SEBI.

• An FPI not meeting above requirements shall comply within a period of two years from the date of registration. An FPI who remains non-compliant even after the period specified above shall be prohibited from making any fresh purchase of securities. It shall also be required to liquidate its existing position in the Indian securities market within a period of 180 days.
• In case of any temporary breach of abovementioned investment limits, the FPI shall comply with the eligibility conditions within 90 days of its breach. In case the foreign portfolio investor remains noncompliant with the said requirement even after 90 days, then no fresh purchases shall be permitted and such FPI shall liquidate its existing position in Indian securities market within a period of the next 180 days.

Vide a consultation paper dated August 25, 2023, the following framework is proposed for channelizing NRI/ OCI investments in the Indian securities markets through the FPI route:

• The contribution of a single NRI or OCI or RI shall be below 25% of the total contribution in the corpus of an FPI.
• At an aggregate level, NRIs and OCIs may be allowed to contribute 50% or more to the corpus of an FPI subject to the following conditions:

– Such entities are based out of an International Financial Services  Centre (IFSC).
– Such entities shall provide to their designated depository participants (DDP), the granular details of all entities holding any ownership, economic interest, or exercising control in the entity in terms of the guidelines and exemptions mentioned in SEBI circular dated August 24, 2023, in case such FPIs fulfil any of the criteria mentioned below:

• FPIs holding more than 33% of their Indian equity Assets Under Management (AUM) in a single Indian corporate group;
• FPIs that individually, or along with their investor group (in terms of Regulation 22(3) of the SEBI FPI Regulations), hold more than INR 25,000 crore of equity AUM in the Indian markets.

In keeping with this, at the 205th meeting of the SEBI Board held in Mumbai on April 30, 2024, SEBI’s Board, inter-alia, approved a regulatory framework in terms of which NRIs,  OCIs  and  RIIs can hold 100% of the total contribution in the corpus of an FPI.  This permission comes with the following rider.

• The FPI is required to submit copies of PAN cards of all their NRI/OCI/RI individual constituents, along with their economic interest in the FPI, to the DDP. If a constituent does not have a PAN, the  FPI  shall  submit  a  suitable  declaration  along  with  copies  of prescribed Identity documents such as Indian passport, OCI Card, Aadhaar, etc. Similar disclosure shall also be required in case of any indirect holding in the FPI   through   non-individual   constituents   that   are   majority   contributed to/owned/controlled by NRI/OCI/RI individuals on a look-through basis.
• In the case of funds set up  in  an IFSC  and  regulated  by  the International  Financial  Services  Centres  Authority (IFSCA), PAN copies would not be required for NRIs/OCIs/RI individuals who have invested in the fund, provided they satisfy the following conditions:

– The investment vehicle that is registered as an FPI should have a single pool for all its investors. There should be no segregated portfolios and all investors in the fund should have pari-passu and pro-rata rights in the fund;
– The fund should have a minimum of 20 investors with each investor contributing not more than 25% to the corpus of the fund.
– Not more than 20% of the corpus of the fund may be invested  in  the  equity  shares  of  an  Indian  listed entity;
– The fund should have an independent investment manager and the investors in the fund should not have any say in the investment decisions of the fund; and
– The investment manager of the fund  should be an  asset  management  company  of  a  SEBI registered mutual fund which is sponsored by a RBI regulated bank or its IFSC based subsidiary/branch.

On August 24, 2023, SEBI had issued a circular (SEBI Aug Circular) addressed to FPIs which provided that FPIs which meet the criteria mentioned below have to disclose granular details of  all  entities holding any ownership,  economic  interest,  or exercising control in the FPI:

• FPIs holding more than  50%  of  their  Indian  equity AUM in a single Indian corporate group; and
• FPIs that individually,  or  along  with  their  investor  group,  hold  more  than  INR  25,000 crore of equity AUM in the Indian markets.

The abovementioned disclosure has to be made to the respective DDPs, on a full look through basis, up to the level of all natural persons, without any threshold, as per a specified format.

In order to avail of the relaxation given to NRIs/OCIs/RIIs to hold 100% of the total contribution in the corpus of an FPI, disclosure as per the SEBI Aug  Circular shall be required if:

• such FPI holds more than 33% of their Indian equity AUM in a single Indian corporate group;  or
• such FPI  along  with  its  investor  group holds  more than  INR  25,000  crore  of  equity  AUM  in  the  Indian markets.

The rationale for not permitting NRIs, OCIs and RIIs to invest into Indian markets through FPI entities goes back to the Report of the Joint Committee on Stock market Scam and matters relating thereto (‘JPC Report’) that was presented to Lok Sabha on December 19, 2002, following the stock market scam of 2001. Overseas corporate bodies, OCBs, in which at least 60% stake was held by NRIs or foreigners of Indian origin, had played a major role in the scam. It was felt that due to their close proximity with Indian entities/ promoters of Indian entities, NRIs, OCIs and RIIs could, if permitted, manipulate Indian stock markets. Thereafter, on September 16, 2003, the RBI had also derecognized OCBs in India as an eligible class of investors. Nevertheless, Indian regulators have always been aware that if NRIs, OCIs and RIIs were allowed to invest in FPIs, it would result in increased FDI inflows.

Thus, it is perfectly understandable that NRIs, OCIs and RIIs were allowed to invest in FPIs provided the FPI is set up in an IFSC. Since the IFSCA is a domestic regulator, the KYC and due diligence undertaken by an IFSC Fund Management Entity in onboarding an investor for its fund and identifying and verifying its beneficial owners shall broadly be the same as carried out by Indian intermediaries, as entities from both these jurisdictions are governed by the PMLA and PMLR. Similar to domestic financial institutions, the institutions in IFSC are also required to be registered with the Financial Intelligence Unit (FIU) and file Suspicious Transaction Reports (STRs). Therefore, compared to other international regulators, IFSC shall have better information sharing mechanism with SEBI and shall be in a better position to oversee structures having predominant NRI/ OCI ownership, with more effective monitoring of the quality of capital flows, in line with the principles prescribed under PMLA/ PMLR and the Foreign Exchange Management Act, 1999.

The minutes of the 205th meeting of SEBI’s Board held in Mumbai on April 30, 2024, can be found here.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com
Paridhi Jain, Associate, Email – paridhijain@elp-in.com