After foreign direct investments (FDI) from neighbouring countries, foreign portfolio investors (FPIs) may now also face regulatory restrictions and higher scrutiny in India.
The government and Securities and Exchange Board of India (SEBI) are contemplating adding mainland China and Hong Kong to the list of "high-risk jurisdictions", said a report by Mint.
Registered FPIs invest in India through 56 jurisdictions and those funds not compliant with regulations as per Financial Action Task Force (FATF), are considered high-risk. At present, 16 FPIs from China are registered with SEBI and Hong Kong has 111.
In line with this, the Department of Economic Affairs (DEA) has worked out a draft proposal and is working on modalities, the sources added.
Moneycontrol could not independently verify the report.
"If the (DEA) proposal is accepted then FPIs from these two locations would face stricter know-your-client (KYC) requirements, not just at the time of registration but also on a continuous basis—they would need to comply with higher reporting standards," one source quoted in the report said.
It would be applicable for firms that have 10 percent of their funds coming from either China or Hong Kong as the end beneficiary but the rules are yet to be finalised.
"New FPIs coming from either China or Hong Kong would require prior Sebi approval after proper vetting. The specific modalities are being worked out by the DEA," a second source added.
No decision has been made on restricting China through the FPI route, news agency ANI reported citing finance ministry sources.
India has grown increasingly wary of China after the coronavirus pandemic and recently reignited border disputes. FDI from China was restricted after the People’s Bank of China (PBOC) raised its stake in Housing Development Finance Corporation to 1.01 percent through open market purchases after stock prices plummeted.
The move raised concerns about foreign acquisitions of strategic Indian companies in a tumultuous market.
(Note: This story has been updated with comments from finance ministry sources cited by a media report.)