SEBI's new regulation targets Non-Resident Indians (NRIs) by allowing them to completely own Foreign Portfolio Investors (FPIs) based in Gujarat International Finance-Tech City (GIFT City). This move aims to significantly boost NRI investment in the Indian stock market.

Previously, there were limitations on the amount NRIs, Overseas Citizens of India (OCIs), and Resident Indians (RIs) could contribute to FPIs. These restrictions capped individual contributions to 25% and total contributions from these groups to 50% of the FPI's total assets. This often meant that even if FPIs found interested NRI investors, regulations prevented them from accepting the desired amount.

The new SEBI rule eliminates this hurdle. By allowing NRIs to hold 100% ownership in an FPI, it opens the door for a potential surge of capital from the Indian diaspora. This is significant because NRI investment in Indian stocks has historically been low despite a large and financially active NRI population. Industry experts believe this rule change will streamline the investment process for NRIs interested in Indian equities, potentially unlocking a substantial new pool of investors for the Indian market.

To benefit from the increased ownership limits, FPIs must provide Know Your Customer (KYC) details for all NRI/OCI/RI investors to Depository Participants (DPs). This includes information like PAN cards or other identification proof and points out their economic interest in the FPI. These measures ensure transparency and allow regulators to identify the ultimate owners of the funds, addressing concerns about potential misuse of the regulation.

Alternatively, FPIs can choose not to submit KYC documentation, but then they'll be subject to stricter limitations. These limitations include maintaining a simple investment structure, ensuring diversification with at least 20 investors, and restricting investment in any single company to no more than 20% of assets under management.

This is expected to benefit the Indian alternative assets industry, including Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs).

You can read the full circular here.