Explained: Sebi's move to open Indian markets to NRIs

Sebi opens FPI route for NRIs

Market regulator Securities and Exchange Board of India (Sebi) on Tuesday announced that it would allow non-resident Indians (NRIs) to hold up to 100 percent in a foreign portfolio investor (FPI). The move is aimed at bringing more NRI capital into Indian markets. Moneycontrol explains the implications of this announcement.

What is the significance of the announcement?

The move will provide free access to NRIs wanting to invest in Indian shares and is expected to unlock a new category of investors in India. Despite having a large diaspora that remits huge sums of money, investments by NRIs in Indian stocks remain miniscule. According to Sebi data, FPIs own assets to the tune of Rs 47 lakh crore in India, of which only Rs 6,761 crore is from NRIs.  In contrast, India received about $30 billion (close to 2.5 lakh crore) in remittances from NRIs overall, data showed.

“This commendable step towards integrating the Indian financial markets with the global investment community is a progressive move that not only simplifies the investment process but also boosts global investors' confidence in the Indian financial ecosystem,” said Suresh Swamy, partner, Price Waterhouse & Co LLP.

What challenges were NRIs facing while investing in India?

Until now, NRIs put together were not allowed to hold more than 50 percent in a fund. Further, a single NRI could not own more than 25 percent in an FPI. This created issues for non-residents who wanted to actively invest in Indian equities. Regulatory certainty was another key issue since regulators in the past have been wary of NRI investments due to concerns over potential roundtripping of money. Sebi allowing 100 percent NRI ownership now is a sort of regulatory blessing for non-residents to invest in India.

What are the conditions to be fulfilled by NRI FPIs?

According to Sebi's press release, FPIs desirous of having 100 percent NRI ownership should be willing to provide PAN and other Know Your Customer (KYC) details of every investor to depositories.

“Where PAN, etc  of investors are not furnished, the enhanced limits are restricted only to FPIs where the investment manager ... is an asset management company of a SEBI registered mutual fund, and sponsored by an RBI regulated bank or its IFSC-based subsidiary or branch,” said Jaiman Patel, partner, EY. “This will effectively exclude all non-bank sponsored AMCs and other fund managers.”

What was Sebi's earlier stance on NRIs?

In 2018, a circular issued by Sebi based on changes to the Prevention of Money Laundering Act (PMLA) had created a panic among NRIs who had invested in Indian markets. The circular said that NRIs could not be beneficial owners of an FPI. According to the PMLA definition, any individual or entity who owns more than 25 percent in a fund would be considered a beneficial owner.  The regulator eventually softened its stance a year later, when new FPI rules were notified. Under the new regime, while FPIs could have NRIs as investors, the non-residents could not have majority ownership.