FinMin, Sebi look to ease curbs on NRI investment through FPI route

The finance ministry and markets regulator Securities and Exchange Board of India (Sebi) are assessing whether the curbs on investment by non-resident Indians (NRIs) through the foreign portfolio investment (FPI) route can be removed, said two people in know.

Currently, NRIs who aren’t tax residents in India can invest in India-focused offshore funds via the FPI route. The maximum cap on NRI investment through this route in any company varies from 24 per cent to 49 per cent of total paid-up capital, depending on the sector. The move, if gets effective, will open up the local markets for the participation of NRI-dominated funds.

The discussions over scrapping the investment limit between the regulator and ministry have come ahead of the Sebi's December deadline, thereby directing that a single NRI could own up to 25 per cent and NRIs put together could own up to 50 per cent in a foreign fund. Also, that the custodians of Category II and III foreign portfolio investors (FPIs) must provide a list of their beneficial owners (BOs) in a prescribed format by the end of this year.

"The regulator and the concerned department have been exploring whether NRIs could be given leeway in terms of compliance in line with the proposed merger of the existing NRI routes with the FPI system, as announced in the Interim Budget 2019-20. If the merger gets through, NRIs will be able to invest up to the maximum FPI limit in a company, which in most sectors is 100 per cent, said a regulatory source privy to the discussion.

However, the sources indicated the views are divided, considering the possible misuse of removing the investment curb. 

“We are assessing various nuances and repercussions associated with it,” said a source in the finance ministry.

According to him, a group of FPIs approached the finance ministry and the markets regulator, seeking removal of the cap amid the Covid-19 pandemic as there has been an exponential rise in the NRI money in many India-dedicated funds.

The sources said that looking at the foreign money inflows, Sebi recently sought details of NRIs from custodians to gauge the quantum of NRI investment and the number of funds dominated by NRIs.

Many industry experts feel scrapping the restrictions will bring more capital and also help domestic fund houses to grow and establish their brand globally.

"Managers of India-focused funds would prefer removal of the NRI restrictions because they find it easier to attract investments from NRIs and persons of Indian origin. This would enable them to market their funds widely and attract more portfolio investments in India. Even if the restrictions on NRIs were to be removed, the beneficial ownership and money laundering rules would remain the same, so the identity of any beneficial owner could be easily determined. The proposed merger of the NRI-PIS (portfolio investment scheme)  route into the FPI route could probably be a step in the direction of allowing 100 per cent NRI participation in FPIs," said Rajesh H Gandhi, partner, Deloitte India.

Finance Minister Nirmala Sitharaman had announced in the July Budget of 2019 that the investment avenues would be merged to give NRIs seamless access to Indian equities.

Currently, NRIs invest in India through the PIS route, which is controlled by the Reserve Bank of India (RBI). According to the rule, NRIs are allowed to invest only 5 per cent in a listed company. If NRIs turn into FPIs, they will have to create a corporate entity or a trust and invest through that.