FPI: NRIs may soon get to invest as FPIs

Move to increase NRI participation in Indian markets as investment limits in listed cos likely to rise significantly..[…]

Non-resident Indians (NRIs) will soon be able to invest in Indian markets as foreign portfolio investors (FPIs). The Securities and Exchange Board of India (Sebi) is planning to create a third category of investors under the current FPI regime for NRIs to invest in the local markets, said two people aware of the development.

The move will enable greater participation of NRIs in the Indian markets as investment limits in listed companies will rise sharply. NRIs will also be able to trade in Indian markets with greater ease since they will be now able to invest through custodian banks. The development is part of the central government’s plan to merge the existing NRI route with the FPI regime as announced in the FY20 interim budget.

NRIs currently invest in India through the portfolio investment scheme (PIS) route, which is regulated by the Reserve Bank of India (RBI). Under the new mechanism, the market investments of NRIs will be effectively governed by Sebi. Even though Sebi had proposed such a merger of routes in September 2018, it could not be implemented due to reservations expressed by the RBI.

Sebi and RBI didn’t respond to queries.

“In December, a meeting was held between various regulators including Sebi and RBI where the issue was discussed,” said one of the persons cited above. “All the concerned parties are now on board with the proposals and we expect to finalise the framework soon.”

NRIs are currently allowed to invest only 5% in a listed company. However, merging the NRI route with FPIs will enable them to invest up to the maximum FPI limit in a company, which in most sectors is 100%. Further, the market regulator is also planning to provide flexibility to NRIs in terms of compliance and costs. As part of this plan, Sebi is planning to waive licensing fees for NRIs registering as FPIs, which could be $2,000-5,000.

“Fee waiver is mandatory since NRIs are individual investors unlike FPIs and hence it would not be viable to charge them steep licence fee,” said the second person cited above. “Also, Sebi is planning to provide further relaxations to NRIs in terms of compliance requirements, keeping in view the nature of investors (NRIs).”

The move will also open up the Indian markets for the participation of NRI-dominated funds. Current rules say an FPI cannot be majority owned or controlled by NRIs. Hence, NRIs put together cannot hold more than 49% in an FPI. However, if NRIs are permitted as FPIs, these restrictions won’t apply, said a Singapore-based hedge fund manager.

“We had in the past tried to launch such India-dedicated funds which would pool the funds from wealthy NRIs in the US and UK,” the fund manager said. “However, due to regulatory restrictions, we could not go ahead.”

Also, NRIs will be allowed to come in through custodian banks. In the PIS system, NRIs are can only do so through the banks where they have opened non-resident rupee (NRE) accounts. However, going forward they can use services of global custodian banks such as Citi or HSBC to invest in India.

NRIs may Soon Get to Invest as FPIs

“Currently, several small banks have NRE customers. However, the banks themselves are not registered as custodians with Sebi. We are exploring if the same banks can be allowed to issue trading licences to NRIs since it would ensure seamless transition,” said one of the persons cited above.

The PIS route will continue to exist for NRIs to make non-market investments including fixed deposits and recurring deposits. NRE accounts held deposits of more than $90 billion at the end of December 2019, RBI official data showed.

The proposal to merge the NRI route with FPIs was originally proposed by a Sebi-appointed committee on easing of FPI norms. The committee was headed by former RBI deputy governor HR Khan and comprised representatives from leading foreign banks, tax consultants and regulatory officials.

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