Explained: How Sebi just made it easier for NRIs to invest in Indian market

Good news for NRIs! India's market regulator, the Securities and Exchange Board of India (Sebi), has made it easier for Non-Resident Indians (NRIs) to invest in Indian markets.

Sebi has now allowed Foreign Portfolio Investors (FPIs) established in GIFT City to accept unlimited investments from Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs). This opens doors for greater participation from the Indian diaspora in Indian markets.

What's changed?

Previously: NRIs and Overseas Citizens of India (OCIs) could only invest up to 50% in a Foreign Portfolio Investor (FPI).

Now: NRIs can own up to 100% of a global fund set up at GIFT City, a special economic zone in Gujarat.

 

What are the benefits?

More investment options for NRIs: This opens doors for NRIs to invest a larger portion of their money in Indian stocks through global funds.
 

Potential for increased investment flows: This move could attract more investment from the Indian diaspora into the Indian stock market.

What's the catch?

Disclosure Requirements:

To ensure transparency, any FPI taking advantage of this rule will need to provide SEBI with details of all its NRI/OCI investors, including their Permanent Account Number (PAN) cards and their investment amount.

To maintain transparency, stricter disclosure rules apply to funds with significant holdings in a single Indian group or large overall holdings in Indian equities. Funds with over 33% of their equity assets under management (AUM) in one Indian group company will need to provide detailed investor information.

Similar disclosures are required if the fund, along with its investor group, holds more than Rs 250 billion (around $3 billion) in Indian equities.

Sebi has emphasized measures to prevent insider trading and market manipulation. Asset management companies (AMCs) must implement stricter controls to identify and address such misconduct.

Increased investment flexibility for passive funds:

Currently, mutual funds cannot invest more than 25% of their assets in companies belonging to the same group as the fund manager (sponsor group). Sebi has increased this limit to 35% for passive funds, but with conditions:

Index replication: This allows passive funds to better mimic the underlying index they track, especially if the index has a high weighting of sponsor group companies (more than 25%).

SEBI-specified Indices: Only for indices approved by Sebi

Overall Cap of 35%: The total investment in sponsor group companies cannot exceed 35%.

Boosting bond market accessibility: Sebi has also reduces the minimum investment amount for bonds issued in India. This makes bond investments more accessible to smaller investors by lowering the entry point from Rs 100,000 to Rs 10,000.

VC funds get a boost: SEBI also approved a new option for venture capital funds to transition to an "alternative investment fund" (AIF) structure. This allows them to manage unlisted or illiquid assets even after their initial investment period ends.

SEBI's recent announcements aim to make GIFT City a more attractive investment destination. By simplifying regulations for NRIs, boosting transparency, and offering more investment options, these changes are expected to increase foreign investment and strengthen India's financial markets.

Preventing market manipulation and misconduct by asset management companies (AMCs)

Previous measures: Sebi previously required strict recording of all communication by dealers and fund managers. This aimed to detect insider trading and front-running (using privileged information to make personal trades before clients). Market participants reported that the recording requirement was cumbersome and contributed to some fund managers leaving the industry.

Sebi's new approach: Sebi is shifting focus from constant recording to a more robust "institutional mechanism." This mechanism will involve:
 

Increased surveillance: More monitoring of trading activity to identify suspicious patterns.

Enhanced internal control: AMCs will need to implement stricter internal procedures to prevent misconduct.

SEBI emphasizes that AMCs will still be held responsible for preventing front-running and insider trading.

Whistleblower mechanism: SEBI mandates AMCs to establish a system for employees to report suspected misconduct internally.  The market regulator aims to strike a balance. They want to prevent market manipulation while also creating a less restrictive work environment for fund managers.  This new approach focuses on proactive measures and increased accountability within AMCs.