Highly discriminatory

Sebi must review its April 10 circular

No one can quarrel with the Securities and Exchange Board of India (Sebi)’s objective to stop round tripping of Indian capital. But the disquiet over its April 10 circular pertaining to beneficial ownership is because of the way the market regulator has gone about it. The poorly drafted circular appears to discriminate against all persons of Indian origin living abroad. The circular puts a blanket ban on the diaspora – non-resident Indians (NRI)s, overseas citizens of India (OCIs) and persons of Indian origin (PIOs) -- investing in Indian markets via the foreign portfolio investor (FPI) route. What's more, given the very broad definition of "beneficial owner" under the Prevention of Money Laundering Act, this could also effectively prevent PIOs from even managing FPI funds operating in the Indian markets.

The group of investors, who went public with their grievances against Sebi on Monday, went overboard by stating that $75 billion of assets under management invested in Indian equities will move out of the country. But the fact remains that the circular is unfair, and the issues don't appear to have been thought through.  The Indian diaspora has always been among the most committed of overseas investors and account for a substantial proportion of the total $425 billion of FPI assets invested in Indian equities. Apart from the investments, there are many senior managers of Indian origin working for India-oriented FPIs. This is not surprising. Due to cultural and family associations, the diaspora has a special interest in India. Expatriates being committed investors is common in other emerging markets as well. A large proportion of China's investments come from the overseas Chinese community, and many asset managers are also of Chinese origin.

Once the deadline of December 31 kicks in, the funds managed by the NRIs, OCBs and PIOs will have to be unwound, or restructured in complicated ways, that may have serious tax implications in other countries.  That would inconvenience and penalise members of the diaspora who have invested for many years in good faith.  Another possibility is that NRIs, OCIs and PIOs will have to relinquish their special status, and revert to simply being citizens of other countries in order to continue holding India investments. Neither option looks desirable. Asset managers of Indian origin may also have to be transferred out of India-focused funds, given the broad definition and interpretation of beneficial owner. On all these grounds, the circular seems oddly racist. There appears to be an implicit assumption that all of the diaspora is involved in money-laundering and round-tripping hawala money into India. This is wrong on a point of principle in that it characterises everyone as a criminal. The circular is also extremely naive in that it targets only the diaspora. White-collar crimes can be committed by anyone, regardless of their racial origins, if there are loopholes in the regulatory structure.

Instead of attempting to impose a blanket ban on the diaspora from investing via the FPI route, the regulator should look at tightening regulations, as applied to all investors and consider a review of the circular, as the regulator promised late Wednesday. The minimum that should have been done is to put out a discussion paper listing the dangers of the structures the regulator is worried about. Any circular that impacts so many investors should have gone through a public consultation process.