Custodians plan to charge higher fee from foreign portfolio investors

Regulatory officials say gains from faster payout will outweigh increased costs

Custodians, who act as brokers for foreign portfolio investors (FPIs), plan to increase fees once the market regulator’s directive on faster remittances comes into effect on September 9.

The Securities and Exchange Board of India (Sebi) has introduced same-day remittances for FPIs, allowing them to access funds on the next-day (T+1) basis as opposed to the current T+2 basis.

The move is expected to benefit FPIs from custodians who may face reduced interest income they pocket from client funds.

At present, custodians pocket interest — similar to the overnight bank rates — on Rs 1 trillion float.

Regulatory officials believe the benefits to FPIs will outweigh increased costs.

“FPIs will gain more than they lose due to the delay in funds, especially with high interest rates,” a senior regulatory official said.

Most of the tax consultancy firms and custodians have agreed for a shorter timeline, said officials from the Big4.

“The custodians have been asked to provide details of the trade by 8 pm while the tax consultants are expected to give the computations by 9 am. This will enable FPIs to deploy funds to trades for the next day and bring them on a par with other investors in the domestic market,” said Suresh Swamy, partner, Price Waterhouse & Co LLP.    

Two other officials from custodians said they charge minimal or negligible fee to FPIs at present as they have revenues from the interest income.

If the NII goes down, however, they may have to increase the fee.

It is expected that the FPIs will be able to deploy their funds to other assets faster, and their gains would be higher than the charges they may have to pay, said industry players.

We don’t have any operational issue as the time was needed only for the tax part. If the current sources of revenues stop, then a higher fee or other charges may be levied. Many FPIs work on different time zones and may not need the funds in such a short timeline. However, for those fund managers who want to use these funds for arbitrage opportunities, faster remittances will be good,” an official with a bank-based custody service said.

The regulator is trying to pitch to the globe that India is accessible and also has ease of going out. They don’t want the intermediaries to hold onto the cash,” another official said.

The impact on custodian floats is expected, though relatively small. However, this will need to be observed over time. It's important to note that events like IPOs, corporate actions, and MSCI rebalancing contribute significantly to higher floats as one-off occurrences, which should balance the expected reduction in regular balances,” said Rohit Agarwal, CEO - Funds Business, Dovetail Capital.

“Direct investors, who represent a smaller portion of overall flows, might show interest in this change. Additionally, many FPIs operate on a bulk funding model, where they do not repatriate every sale proceeds, so these investors might not be significantly impacted by this change,” Agarwal added.

However, tax consultants said they are ironing out possible operational issues and have shifted their teams to different shifts to cater to the new diktat.

We can’t say that there has been an overwhelming demand, but some FPIs have been requesting for the changes, similar to those available to other investors in India. However, this will be a significant dent to the custodian’s income,” said Anand Singh, founder, Elios Financial Services, and a member of Capital Market Task Force, FSC Mauritius.

Another tax consultant estimated that the custodians may want to recover at least 20-30 per cent of the cost from FPIs once their float goes down.

On a roll

> Sebi has directed custodians to provide T+1 settlement for FPIs

> Faster remittances to bring FPIs on a par with domestic investors in India 

> Tax consultants, custodians to roll faster remittances from September 9

> Custodians to provide trade details by 8 pm, tax computations to be shared by 9 am the following day

> Currently, custodians gain interest on the float, or client fund of FPIs

> Float with custodian is to the tune of Rs 1 trillion, which may reduce with the new norms