Rule change: How do SEBI norms attract higher NRI investments in India?

The market regulator, SEBI, has made amendments for foreign portfolio investors (FPIs) based in IFSCs to accept 100% contribution from NRI, OCI or resident Indians Read more to understand.

13 May 2024
Rule change: How do SEBI norms attract higher NRI investments in India?

In a move to attract more investment from Non-Resident Indians (NRIs), the Securities and Exchange Board of India (SEBI) has implemented a new rule for foreign portfolio investors (FPIs) based in Gujarat International Finance-tech City's (GIFT) International Financial Services Centre (IFSC). This change can significantly boost NRI investment in the Indian stock market.

Positives for NRI investors: How? 

So far, if fund managers in the GIFT City want to invest in India, they should register as FPIs with SEBI and will be governed by foreign portfolio regulations. These regulations limit individual contributions from NRIs, overseas citizens of India (OCIs), and Resident Indians (RIs) to less than 25% of the total assets of FPIs, and their combined contribution should be under 50% of the total assets. In other words, even if the asset management companies (AMCs) or FPIs find investors willing to invest with them, the fund managers can’t accept them (the amount) due to the restrictions. 

The recent amendments change this specific rule. The new regulation allows NRIs to hold up to 100% ownership in an FPI, paving the way for a potential surge of capital from the Indian diaspora.

As per multiple media reports, despite a large and financially active diaspora, NRI investment in Indian stocks has historically been low. SEBI data shows a vast discrepancy between overall NRI investment in India and their participation in the stock market. A Moneycontrol report stated that while FPIs hold nearly Rs 47 lakh crore in Indian assets, only Rs 6,761 crore comes from NRIs. In contrast, India receives substantially more (around $30 billion or Rs 2.5 lakh crore) in remittances from NRIs overall. Industry experts anticipate this rule change (from SEBI) to streamline the investment process for NRIs interested in Indian equities, potentially unlocking a significant new pool of investors for the Indian market.

Investor protection

SEBI has also implemented safeguards to prevent misuse of the new regulation. To benefit from the increased ownership limits, FPIs must provide Know Your Customer (KYC) details, including PAN cards or other identification proof for all NRI/OCI/RI investors to Depository Participants (DP), along with their economic interest in the FPI. This ensures transparency and allows regulators to identify the ultimate owners of the funds. 

Alternatively, FPIs can choose not to submit such documentation, but must then adhere to stricter limitations. These limitations include maintaining a simple investment structure with a single pool of investments, ensuring diversification with at least 20 investors, and restricting investment in any single company to no more than 20% of assets under management. These safeguards address potential concerns about round-tripping of funds and ensure the integrity of the Indian financial system.

Takeaway

Overall, SEBI’s rule change presents a significant opportunity to attract greater NRI investment in the Indian stock market. By streamlining the investment process and fostering trust through transparency measures, this decision has the potential to unlock a new era of growth for the Indian financial sector. This is expected to benefit the Indian alternative assets – PMS and AIF - industry as well. 

Also, savvy investors are likely to be familiar with the Indian market and are increasingly aware of the investment opportunities in the country. They look to leverage the GIFT IFSC's tax advantages. This trend is expected to snowball, attracting a wider pool of international investors as the GIFT IFSC's fund management sector matures. About 114 fund management entities have registered, and the GIFT IFSC is poised to raise a substantial $8.4 billion from global investors.

Recent Blogs

What are the investment opportunities in Indian Residential Real Estate?

Here is a summary of an interesting presentation from ASK on investment opportunities in the Indian residential real estate market from PMSBazaar Bengaluru Conclave 2024

PMS vs Gold: PMS glitters more than gold in 10 years

In a study conducted by PMSBazaar, PMS investment approaches outshines gold and equity market returns in the long-term (10 years).

Debt PMS - A new alternative in debt investing

One of the insightful discussions on Debt PMS, at the PMS Bazaar Conclave 2024 held in Bengaluru, from Sundaram Alternates.

How do PMS fund managers navigate the market to deliver alpha?

An eminent panel sat together in PMS Bazaar Conclave 2024 held in Bengaluru to show how fund managers get their excess market-beating returns. Given all the spotlight on the India growth story, they shed light on which macro factor was driving this economic upswing.