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Sebi allows NRIs to own up to 100% in global funds at the GIFT City

Mumbai, Apr 30, 2024 

Sebi gives more exposure to passive funds in group firms 

The Securities and Exchange Board of India (Sebi) on Tuesday allowed non-resident Indians (NRIs) to own up to 100 per cent in global funds at the GIFT City and gave passive funds more exposure to group companies.

Currently, NRIs and Overseas Citizens of India (OCIs) cannot own more than 50 per cent in a foreign portfolio investor (FPI). The move could pave the way for greater flows from the Indian diaspora into the domestic stocks.

“A 100 per cent contribution limit shall be available subject to the FPI submitting copies of Permanent Account Number (PAN) cards of all their NRI/OCI individual constituents, along with their economic interest in the FPI,” the markets regulator said.

Market experts believe a more liberalised regime for NRI/OCIs could lead to twin benefits — boost the fund ecosystem at the GIFT City as well as attract genuine flows from overseas Indians. At present, the combined holdings of NRIs and OCIs in a global fund must be less than 50 per cent, while that of a single NRI or OCI is capped at 50 per cent.

“The conditions set forth for this increased participation are meticulously designed to balance the need for flexibility with the imperative of managing regulatory risk,” said Suresh Swamy, partner at Price Waterhouse & Co.

Moreover, such FPIs will still have to adhere to the granular disclosure norms on economic interest and ultimate ownership issued by the regulator in August last year.

The move will ensure that the NRI route is not used to circumvent rules such as the 25 per cent minimum public shareholding requirement.

Mutual fund (MF) schemes, at present, can invest not more than 25 per cent of their net asset value (NAV) in group companies of the sponsor. The limit has been raised to 35 per cent for passive funds, subject to certain conditions.

The approval of passive funds to go beyond the 25 per cent limit in sponsor’s firms will help them replicate the underlying index where the group companies comprise more than a quarter in the index. However, this flexibility will be provided only on indices specified by Sebi and will have an overall cap of 35 per cent investment.

According to industry players, the move could help Jio Financial Services’ mutual fund unit as the parent, Reliance Industries, has significant weightage in several indices.

A joint venture by Jio Financial Services and Blackrock plans to enter the asset management business with opportunities in passive funds and awaits regulatory approval.

Sebi has also directed fund houses to implement an institutional mechanism to curb front-running in lieu of the requirement around the recording of all communication by dealers and fund managers.

The move to set up an institutional mechanism will entail more surveillance and internal controls to deter potential market abuse like front-running and insider trading. The regulator will put more onus and accountability on the management of asset management companies in such instances and will mandate the fund house to have a whistleblower mechanism.

Once such a mechanism is put in place, Sebi said it would exempt asset management company employees from stringent requirements like recording of face-to-face interactions and communications during market hours and out of office interactions.

According to market participants, several fund managers had quit the industry in recent years due to the constant surveillance on them.

In the board meeting, Sebi also approved an option for venture capital funds to migrate to an alternative investment fund structure to deal with unliquidated assets after their tenure. Sebi had earlier provided a framework for AIFs to deal with such situations.

In a bid to promote non-institutional investors in the bond market, Sebi approved the issuance of non-convertible debentures and non-convertible redeemable preference shares through private placement mode at a reduced face value of Rs 10,000. However, they will be required to appoint a merchant banker for the same.

Key Announcements and Implications

-- NRIs, OCIs coming via Gift City to gain greater exposure to domestic equities

Implications: At present, the combined holdings of NRIs and OCIs in a global fund must be less than 50 per cent. The move will allow NRIs, OCIs to own up to 100% in a global fund domiciled at International Financial Services Centres (IFSCs).

-- Passive funds allowed 35% exposure to group companies of sponsor

Implications: Currently, a mutual fund is not allowed to invest more than 25% of corpus in group companies of the sponsor. This can lead to tracking error for exchange-traded funds (ETFs). More investment legroom will allow passive funds, ETFs to mimic the index performance better.

-- Institutional mechanism to curb market abuse

Implications: Following some instances of front-running, Sebi directed fund houses to record all communication of dealers and fund managers—out of office, during market hours. The move increased pressure on employees, some quit under stress. Sebi said it will relax some of these requirements as long as a fund house sets up institutional mechanisms to prevent market abuse. Onus of preventing market abuse shifted to asset management companies.

[The Business Standard]

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