SEBI Opens Doors For NRIs, OCIs, And RIS: A Detailed Look At Relaxed Investment Regulations In IFSC-Based FPIs

On June 27, 2024, SEBI vide circular no. SEBI/HO/AFD/AFD-POD-2/P/CIR/2024/89[1] introduced changes to SEBI regulations regarding participation by Non-Resident Indians (“NRIs”), Overseas Citizens of India (“OCIs”), and Resident Indians (“RIs”) in Foreign Portfolio Investors (“FPIs”) based in International Financial Services Centres (“IFSCs”) in India. This circular amends the Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible   Foreign Investors No. SEBI/HO/AFD/AFD-PoD-2/P/CIR/P/2024/70 dated May 30, 2024 (“FPI Master Circular”).[2]

Explanation

Earlier, SEBI regulations limited the participation of NRIs, OCIs, and RIs in FPIs registered in IFSCs in India. This restricted their ability to invest in Indian securities markets through certain structures. The new regulatory framework includes the following:

Increased Investment Limits

• SEBI has removed the restriction on the aggregate contribution of NRIs, OCIs, and RIs in IFSC-based FPIs.
• Previously, they could contribute up to 50% of the FPI’s corpus/total investment pool.
• They can now contribute up to 100% of the FPI’s corpus.

Simplified Registration Process

• FPIs intending to have 50% or more contribution from NRIs/OCIs/RIs must submit a declaration to their Designated Depository Participant (“DDP”). This declaration signifies their intent to leverage the relaxed investment limits. Existing FPIs have a grace period of 6 months to comply with this requirement.
• These FPIs need to provide the DDP with details and documents of their NRI/OCI/RI investors. This includes PAN cards (for NRIs who have them) or relevant declarations explaining the absence of a PAN or exemption from obtaining one. Similar requirements apply for non-individual FPI constituents ultimately controlled by NRIs/OCIs/RIs.

Conditions for IFSC Funds

IFSC-based fund structures utilizing the relaxed NRI/OCI/RI contribution rules must adhere to specific conditions. These include the following:

• All investor contributions must be pooled into one investment vehicle at the IFSC, eliminating the use of separate side pockets for individual investors.
• The FPI’s corpus functions as a blind pool (common portfolio) with no segregated investor holdings. All investors have pari-passu (equal footing) and pro-rata (proportional) rights to the FPI’s returns and gains based on their contribution. Issuing separate classes of units is only allowed for currency segregation purposes, but these units must be pari-passu and pro-rata after conversion to a common currency.
• To ensure a balanced portfolio, these FPIs can invest a maximum of 20% of their corpus in the equity shares of any single listed Indian company. Existing FPIs exceeding this limit are granted a three-month grace period to comply. The regulations also outline steps for addressing both passive breaches (due to market movements) and active breaches (intentional) of this limit.
• To prevent excessive concentration, the FPI must have a minimum of 20 investors with each contributing no more than 25% of the corpus. Similar compliance timelines and breach rectification procedures apply as with the investment diversification rule.
• Investment decisions for the FPI must be made by a completely independent Investment Manager/Fund Manager. SEBI regulations restrict this role to Asset Management Companies of SEBI-registered Mutual Funds (sponsored by Reserve Bank of India-regulated banks) or their IFSC-based subsidiaries/branches. This would ensure professional and unbiased investment management.
• For FPIs complying with the relaxed NRI/OCI/RI contribution rules, the minimum holding percentage that triggers takeover regulations has been reduced from 50% to 33%. This offers more flexibility for these FPIs without compromising investor protection.

Conclusion

These regulatory changes aim to make IFSC-based FPIs more attractive to NRIs, OCIs, and RIs by increasing investment flexibility, streamlining the registration process, and focusing on investor protection. This is expected to encourage greater participation from these investor segments in Indian capital markets, enhance the liquidity and depth of the Indian financial system, and contribute to the overall development of India’s IFSCs as global financial hubs.

[1] https://www.sebi.gov.in/legal/circulars/jun-2024/participation-by-non-resident-indians-nris-overseas-citizens-of-india-ocis-and-resident-indian-ri-individuals-in-sebi-registered-fpis-based-in-international-financial-services-centres-in-india_84449.html.

[2] https://www.sebi.gov.in/legal/master-circulars/may-2024/master-circular-for-foreign-portfolio-investors-designated-depository-participants-and-eligible-foreign-investors-_83689.html.