The proposal aims to enhance investments in India by Foreign Portfolio Investors (FPIs) through increased participation from Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs) based in International Financial Services Centres (IFSCs) and regulated by IFSCA. This proposal is designed to balance facilitating investment with risk mitigation measures.
In the past, under the Foreign Institutional Investors (FIIs) regime, NRIs were not allowed to register, as FIIs or sub-accounts, and companies' majority owned by NRIs could not invest as FIIs. However, they could invest in funds registered as FIIs or in companies promoted by NRIs. When the FPI regime was introduced in 2014, similar restrictions applied to NRIs and OCIs. This sparked discussions and led to a working group's formation in 2018, which eventually led to guidelines issued in September 2018.
Under current regulations, NRIs and OCIs cannot register as FPIs, but they can be constituents of FPIs based on certain conditions. These conditions include ensuring that a single NRI/OCI's contribution is below 25% of the FPI's corpus, and the aggregate contribution of NRIs, OCIs, and RIs (Resident Indians) remains below 50%. Additionally, NRIs, OCIs, and RIs cannot be in control of the FPI.
There has been a consistent demand to increase NRI/OCI investments in Indian securities markets. While NRIs can invest through the Portfolio Investment Scheme (PIS), this limits their ability to invest in professionally managed overseas-pooled structures.
To address these issues, the proposal suggests allowing FPIs based in IFSCs and regulated by IFSCA to have NRIs/OCIs contribute more than 50% to their corpus. IFSCA, being an Indian regulator, can effectively oversee these FPIs, ensuring compliance with Anti-Money Laundering (AML) regulations and KYC processes. The proposal also suggests a stricter framework for identifying and verifying beneficial owners (BOs) in such FPIs.
This proposal balances the need to facilitate NRI/OCI investments in India with measures to prevent market manipulation and ensure transparency. By allowing NRIs and OCIs greater participation in FPIs based in IFSCs, the proposal aims to attract more investments into India's securities markets. It also addresses concerns related to the identification and verification of BOs and the potential for market manipulation that was highlighted in the past.