Single investment regime works for NRIs

NRIs are currently allowed to invest in Indian markets directly and indirectly through multiple routes.. […]

India may soon have one investment avenue for non-resident Indians (NRIs). A Securities and Exchange Board of India panel is set to suggest that the NRI and portfolio investment scheme (PIS) routes be merged with that of foreign portfolio investors (FPIs). The move is aimed at having a uniform regime for all foreign portfolio investors, said three people close to the development.

“The merger will help Sebi regulate NRI investments in India as the regime is currently unregulated. There is no reporting and monitoring for NRIs, but this proposal will now bring them under Sebi,” said one of the persons. “For investors, it will be less disruptive as they just have to migrate to FPI. Also, all the current limitations on NRI investments under the FPI regulation will go away.”

NRIs are currently allowed to invest in Indian markets directly and indirectly through multiple routes. NRIs and persons of Indian origin (PIOs) are allowed to invest directly in Indian companies under PIS. They can also purchase mutual fund units, invest in private equity funds and use the offshore FPI route. Besides, NRIs and PIOs are allowed to invest in debentures of Indian companies and government securities.

NRI investments are governed under Foreign Exchange Management Act besides having to abide by Sebi regulations and the foreign direct investment policy. “The nature of regulation in foreign portfolio investment has been accumulating over time, without a cohesive core,” said Sandeep Parekh, founder, Finsec Law Advisors.

“NRIs, OCIs (overseas citizens of India) and PIOs are concepts meant to extend the rights of people who have deep ties to India because of their origin. When the same concept is directly adopted in investment laws and used to impose restrictions on such a broad class of people, this in turn becomes a restriction on such people.”

KHAN PANEL TO SUGGEST SWEEPING CHANGES

Sebi set up a high-powered panel under the chairmanship of former Reserve Bank of India deputy governor HR Khan, assisted by custodians, lawyers and chartered accountants, to review all FPI regulations. The committee submitted its interim report to the regulator last month. It’s expected to submit the final report by next month to Sebi, proposing sweeping changes to FPI regulations, sources said.

Some lawyers said regulators should maintain consistency in their policy-making. “Merging the existing NRI/OCI portfolio investment scheme route with FPI will act as a forced diktat on NRIs to only invest through fee-based pooling vehicles like FPIs, mutual funds and AIFs (alternative investment funds) and not invest directly in India,” said IC Universal Legal senior partner Tejesh Chitlangi. “A proposal to do away with this age-old route of NRI investments in India may not be warranted.”

The proposal is surprising because the regulator had been seeking to curtail NRI participation via FPIs since the direct route was available to them, he said, adding that this move didn’t seem to be in line with past concerns. The segregation of NRIs from other foreign investors had been meant to protect them and give them an advantage, said Parekh.

“But successive interpretations and the factual changes on the ground have made it a limiting factor for NRIs who have a cap on investments,” he said. Streamlining the definition of NRIs to only include citizens of India living abroad would be a commendable step and integrating all foreign investors in the same category would be a good reform, he said. It will also help create a simple and well-regulated market where Sebi has full oversight of all portfolio investment, instead of being fragmented between RBI (for NRIs) and Sebi (for other FPIs), Parekh said.

Sebi eased norms for NRIs last month based on the Khan panel’s recommendations. The committee had suggested that NRIs, OCIs and resident Indians should be allowed to hold non-controlling stakes in FPIs and there should be no restriction on them managing offshore funds. NRIs have been allowed to invest as FPIs if a single holding is under 25% and a group holding is under 50% in a fund.

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