Market regulator Sebi mulls diluting controversial FPI KYC norms: Sources

April circular likely to exempt PIOs, publicly pooled funds

The market regulator, Securities and Exchange Board of India (Sebi), may soon dilute some of the controversial provisions notified in its April 10 circular on foreign portfolio investors (FPIs).

Sources say the regulator is mulling exempting people of Indian origin (PIOs) from the ambit of the new Know Your Customer (KYC) norms. Publicly pooled funds could get more leeway with regards to investment ceilings in individual companies.

Following the backlash over the April 10 circular, Sebi has deferred the implementation of the new norms by two months and has referred the matter to the H R Khan-led committee, set up for easing of FPI access norms.

The committee held a meeting on Wednesday with key stakeholders where a host of issues were discussed.

Sources say the finance ministry nudged Sebi to have a fresh look into the matter after some FPI lobbies expressed displeasure over some of the provisions issued in the FPI KYC circular.

“The idea is to find a middle ground so that the law remains tough while genuine cases get exemption. The committee is finalising the regulations and will soon submit a report to Sebi. The new norms should assuage the fears expressed by FPIs,” said a source.

Sebi also came out with an official press release on Wednesday, saying it would “review the recommendations and shortly take a holistic view”.

Placing curbs on PIOs and non-resident Indians (NRIs) controlling FPIs was amongst one of the most widely-debated measure of the April 10 circular.

According to FPI rules, PIOs and NRIs are not allowed to be beneficial owners (BOs) of an FPI. However, in the circular, Sebi clarified that beneficial ownership should not be determined based on economic interest only but should also consider who controls the fund. This created panic among several India dedicated FPIs since a lot of them were managed by Indians or Indian entities.

Sources say the Khan committee has taken the view that PIOs should not be considered on a par with NRIs since a lot of the PIOs don’t have any India connection. However, the committee has recommended status quo for NRIs from controlling FPIs.

Another key provision of the circular was clubbing of investments controlled by the same BOs for purpose of FPI limit calculation. According to Sebi regulations, no FPI can own more than 10 per cent in a single company. According to the April 10 circular, in cases where there was no visible beneficial owner, the senior management officials (SMOs) will be considered BOs. This could spell trouble for several foreign mutual funds investing in India such as Fidelity, Franklin Templeton, etc. since they pool money from millions of unit holders and according to the provisions, the fund managers of each fund will end up as BO. In such case, the investments of all funds managed by the fund manager will be clubbed for calculating FPI limits.

In this regard, the expert committee is learnt to have taken the view that ownership of different funds should not be clubbed in cases such as publicly pooled investments since there is not much overlap in investors.  

Sources say the committee will be suggesting few conditions such as no overlap of investors, a maximum 10 per cent investment by a single investor or fund, and a minimum number of investors. If the conditions are met, the fund will be exempted from stricter investment.

The Sebi’s plan comes within a week after FPI lobby AMRI expressed its displeasure over the Sebi KYC circular. The lobby said if the provisions of the circular are implemented, several funds will be forced to offload their exposure to India.