NRI Offshore Fund Managers Request to SEBI for Some Relief

Non-resident Indian (NRI) offshore fund managers seek Securities and Exchange Board of India (SEBI) to permit them to own a minimum of 5 percent in their fund.

There was an announcement on April 10, in which the market regulator said that the NRIs are not allowed to invest as foreign portfolio investors (FPIs).

It was also said that FPIs that were supported by NRIs discussed this with the SEBI officials on Thursday. The regulator will be finalizing and taking a decision on this matter within the coming week.

This decision is important as many India-dedicated funds are presently functioning while violating the circular from SEBI. If a solution to this issue is not found by December, they would be obligated to wrap up these funds.

The estimates and statistics suggest that about one-third of the total FPI assets are managed by Indian companies or are promoted by NRIs or PIOs (person of Indian origin).

However, as per the guidelines by SEBI, an NRI or PIO cannot be a “beneficial owner” of a foreign fund. He or she is not entitled to invest as an FPI.

Getting seed capital for the fund is a common practice when we start any pooled fund. This process is termed as ‘skin in the game’ and helps to build confidence. In fact, doing this is a statutory obligation in many countries for starting a fund.

For example, in Singapore, the founding members or the fund managers have to necessarily invest a mandatory seed capital of about $240,000 or more while starting the fund.

The main reasons for SEBI taking a tough stance regarding NRI investments coming through FPIs are the concerns regarding money laundering and regulatory arbitrage.

The FPI guidelines were framed so as to pull in additional foreign investments into the country. Therefore, these funds are granted with various incentives, which include a simple and easy process for registration, flexibility in case of taxation and also in compliance. Indian officials have a doubt that permitting NRIs to make investments via the FPI route could end up in round-tripping. Also, there could be loose ends in the form of opportunities for arbitrage as it would support domestic money to be channelled via the FPI route to shun taxes.