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SEBI Panel May Suggest Easing Ownership Rules For Foreign Funds

Amid concerns over tighter foreign fund ownership and know-your-customer rules, a panel set up by market regulator SEBI may suggest easing the norms, according to three people with direct knowledge of the matter. These new rules have sparked fears of substantial fund restructuring or shut downs which may consequently lead to large outflows from the Indian equity markets.

The committee, set up by the Securities and Exchange Board of India on Aug. 21, in a draft report circulated among members last week, suggested addressing some of the concerns of asset managers, said the first of the three people quoted above requesting anonymity. The panel, headed by HR Khan, former deputy governor of the Reserve Bank of India, is scheduled to meet tomorrow and has invited representation from Asset Managers Roundtable in India, the person said.

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The lobby group, in a press conference on Monday, had sought changes citing fears of foreign fund outflows. Their concerns stem from SEBI’s April 10 circular that bars non-resident Indians, persons of Indian origin and overseas citizens of India from being a beneficial owner—an investor holding above a particular threshold.

That has pushed a lot of foreign fund structures in trouble, said Tejesh Chitlangi, senior partner at law firm IC Universal Legal. “If such a restriction on NRIs is done away with, it would resolve difficulties which certain FPIs are facing.”

Sandeep Parekh, managing partner at Finsec Law Advisors, however, said “the concept of NRI is not troubling as NRI is defined in terms of duration of residency and therefore may not impact most of the foreign resident fund managers”.

The Khan panel’s proposals, once finalised, will be presented to the SEBI board after consultation with the Finance Ministry.

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A SEBI spokesperson, in an emailed response said, it’s yet to get recommendations from the committee. Earlier in the day, Bloomberg, citing people with knowledge, had reported that the regulator is open to making changes in rules.

What The Panel Suggests

Here are the panel’s draft recommendations, according to people quoted earlier:


SEBI’s April 10 circular said non-resident Indians can’t be beneficial owners or in control of an overseas investment fund. A fund manager is typically in control when beneficial ownership can’t be defined in case of a diversified investor base.

Panel’s Proposal

NRI fund managers from Financial Action Task Force-compliant jurisdictions may be exempt from the rule, said the second of the two people quoted above. 37 countries are members of FATF— a global body to combat money laundering and terrorist financing.

Why The Change?

The new rule, according to asset managers, unfairly prevents NRI-managed or promoted institutions from attracting global investors into India. It could lead to unwinding and restructuring of funds.

Yet, only exempting FATF member nations would leave out 70 other countries that are part of the International Organization of Securities Commissions—an association of regulators that oversees securities markets. That would be undesirable as Mauritius, a large contributor to overseas inflows, will get left out, said Chitlangi. Total investments coming through Mauritius stood at nearly Rs 4.49 lakh crore as of July 2018.


Persons of Indian origin and overseas citizens of India can’t be beneficial owners of a foreign portfolio investment fund.

Panel’s Proposal

Exempt these categories of investors, according to the first person quoted earlier.

Why The Change?

The industry cited difficulties in identifying PIOs and OCIs. Several of them have no real connection with India, according to Chitlangi, and they just get categorised as such by virtue of either their parents or grandparents being born in India.

Parekh said the inclusion of the term OCI was problematic. “As the latter is a voluntary action of seeking the OCI card.”

“The most problematic definition is of PIOs. Though the concept has been done away with, it finds mention at various places including the FAQ (frequently asked questions) of SEBI and includes people whose third generation ascendants lived in India,” Parekh added.


FPIs are currently allowed to invest up to 10 percent in a listed Indian company. The investment limit of FPIs will be clubbed if they have the same beneficial owner.

Panel’s Proposal

Not to club the investment limits.

Why The Change?

Any investment beyond 10 percent becomes foreign direct investment, which requires a different level of compliance and isn’t suited for investors looking to just invest in the securities markets. The rule could trigger a selloff in the market.

Also read: SEBI May Junk Plan To Identify High-Risk Countries For Foreign Investments