Photographer: Paul Goguen/Bloomberg

SEBI’s Revised Directive For FPIs And NRIs: Hip, Hip, Hooray?

SEBI’s April 10 circular. Backlash. Hope. Relief.

Foreign portfolio investors, non-resident Indians, and overseas citizens of India have lived this reality for the last six months. SEBI’s April 10 circular resulted in a backlash from these stakeholders, the promise of revisiting its diktat on know-your-customer requirements and eligibility conditions for FPIs gave them hope, and now, the market regulator’s decision to ease the rules has brought some relief.

The most critical aspect of the relief is the de-linking of KYC requirements and eligibility conditions, experts told BloombergQuint.


In April this year, SEBI had introduced new KYC requirements for foreign portfolio investors. Here’s what the regulator did:

  • It laid down thresholds for NRI investments in India: NRIs could no longer be beneficial owners of FPIs. Beneficial ownership for FPI funds—structured as a company or trust—was defined to mean more than 25 percent interest and control. The threshold for identifying beneficial ownership of FPI funds structured as partnership firms was 15 percent.
  • If together, the combined ownership of NRIs exceeded any of the beneficial ownership thresholds, that too was not permitted.
  • Investment limit of FPIs was clubbed if they had the same beneficial owner.
  • India-based investment managers could no longer be beneficial owners of FPIs.


Soon enough, FPIs and NRIs voiced their concerns against this circular, which prompted SEBI to request a high-powered panel to suggest appropriate changes. In its board meeting last week, SEBI agreed to revise its April directions. Now, the beneficial ownership criteria will apply only for KYC purposes and won’t impact the eligibility of FPIs to invest in India.

1. KYC Requirements

  • First, as per the April 10 circular, NRIs could not be beneficial owners of FPIs. Now, FPIs are only required to disclose their beneficial owner. To identify the beneficial owner, SEBI has prescribed thresholds mentioned in the Prevention of Money Laundering Act. And so, if the FPI is structured as a company or trust, then the individuals who own more than 25 percent interest or control would need to be disclosed. The threshold for FPI structured as a partnership is 15 percent.
  • Second, there’s a new condition for FPIs structured as partnerships – the concept of control. The PMLA rules require partnership-structured FPIs to identify beneficial owner only on the basis of economic interest. But SEBI has added a control to the mix. So if an individual holds less than 15 percent in an FPI structured as a partnership but controls it, a disclosure would be required.

The PMLA doesn’t require FPI’s, set up as partnerships, to disclose their general partners and disclosure is required of only limited partners who hold more than 15 percent economic interest in the partnership, Rushabh Maniar, partner in the funds practice team at AZB & Partners told BloombergQuint.

But now, as per SEBI’s revised circular, general partners (GPs) – who control the FPI- would need to be disclosed as well.

In a partnership structure, GPs typically have the right to appoint the investment manager, directors or the management, which amounts to control. And so, not only details relating to the natural person who meets the 15 percent economic threshold in the FPI, but also details relating to GP will need to be disclosed.
Rushabh Maniar, Partner, AZB & Partners
  • Third, even if the beneficial owner in a FPI is a listed company, a disclosure would be required. This is contrary to what the PMLA requires. If the controlling interest in a FPI is with a listed entity, PMLA doesn’t require any disclosure of the individuals behind the listed company.

That’s not the case under the SEBI circular, Siddharth Shah, partner in the funds practice of law firm Khaitan & Co. pointed out.

This could become an administrative nightmare. The difficulty isn’t in identifying the beneficial owner but it is in monitoring the economic interest that keeps changing in a listed company.
Siddharth Shah, Partner, Khaitan & Co.

Existing FPIs have been given six months to make the KYC disclosures.

2. Eligibility Conditions

Earlier, SEBI had imposed a blanket ban on NRIs, OCIs and resident Indians by saying that these entities can’t be beneficial owners of FPIs. This blanket ban has now been done away with but with certain riders.

A single NRI, OCI, and resident Indian can own less than 25 percent in a FPI and in aggregate, the economic ownership has to be less than 50 percent. This is what even the April 10 circular mandated.

The relief has come on the control front.

Though NRIs, OCIs, resident Indians still can’t be in control of FPIs, SEBI has given a structural leeway. These entities can be the beneficial owners if they control an FPI through an investment manager which is either regulated in its home jurisdiction and registers itself with SEBI, or it is set up under Indian laws and registered with the market regulator.

This flexibility has addressed most of the concerns that stakeholders had, Shah said. He explained that most FPIs are a pooled vehicle, the investment manager is a corporate vehicle which get a management fee, performance fee etc. and is a service provider to the pooled vehicle.

As long as this corporate entity fulfils either of the two criteria mentioned above, NRIs, OCIs and resident Indians can be in the beneficial owners and control the FPI.
Siddharth Shah, Partner, Khaitan & Co.

Maniar still sees an issue here. He pointed out that there could be structures where the investment management entity only has the power to take investment decisions and the control over the FPI could also be with other entities, such as a GP.

The language of the new circular seems to suggests that if a NRI is the owner of the GP and is controlling the FPI, then the carve-out won’t be available even if the investment management entity fulfils the registration criteria.
Rushabh Maniar, Partner, AZB & Partners

There is some relief for resident Indians as well. To reiterate, as per the April 10 circular, resident Indians could not be beneficial owners of FPIs. Now, if a SEBI registered mutual fund entity in India obtains a no-objection certificate, it can control a FPI.

But Indian portfolio managers can’t.

The carve-out has not been extended to an Indian portfolio manager which has a license to manage an offshore fund, Shah pointed out. He said that the only way an Indian portfolio manager can now be in control is by using the structural leeway i.e. set up an off-shore investment manager and abide by the riders.

This could’ve been avoided by applying the exemption given to mutual funds to any registered intermediary, Shah added.

Existing FPIs now have two years to satisfy the eligibility conditions.