In a significant policy shift, the Securities and Exchange Board of India (SEBI) has now allowed Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and Resident Indian Individuals (RIIs) to hold 100% participation in Foreign Portfolio Investors (FPIs) based out of International Financial Services Centres (IFSCs) in India.
Historically, NRIs and OCIs faced stringent restrictions under SEBI regulations. The SEBI (Foreign Institutional Investors) Regulations, 1995 barred NRIs from registering as Foreign Institutional Investors (FIIs) or sub-accounts, and even companies with majority NRI ownership were restricted from investing as FIIs. While NRIs could be investors in funds that registered as FIIs, direct registration was off-limits.
These restrictions carried over into the SEBI (Foreign Portfolio Investors) Regulations, 2014. Although NRIs and OCIs could invest in FPIs, they were not eligible to register as FPIs themselves. However, they could act as investment managers for other FPIs. A circular issued by SEBI on April 10, 2018, reinforced this stance, explicitly stating that NRIs, OCIs, and RIIs could not be beneficial owners of FPIs, except under certain conditions.
Further clarifications on September 21, 2018, laid out specific guidelines for NRI, OCI, and RII participation in FPIs. The rules stipulated that no single NRI or OCI could contribute more than 25% to an FPI, and their aggregate contributions could not exceed 50%. Additionally, NRIs, OCIs, and RIIs were prohibited from controlling FPIs unless they met stringent criteria, such as being an ‘offshore fund’ with a SEBI ‘No Objection Certificate’ or being managed by a regulated entity.
In an August 25, 2023, consultation paper, SEBI proposed a new framework for channeling NRI/OCI investments through the FPI route. This framework suggested allowing NRIs and OCIs to contribute 50% or more to an FPI’s corpus, provided the entities were based in an IFSC and complied with detailed disclosure requirements.
On April 30, 2024, during its 205th meeting, SEBI approved a regulatory framework permitting NRIs, OCIs, and RIIs to hold 100% of the total contribution in the corpus of an FPI. This comes with the stipulation that FPIs must submit copies of PAN cards and other identity documents for all NRI/OCI/RI constituents to their designated depository participants (DDPs). Funds in IFSCs regulated by the International Financial Services Centres Authority (IFSCA) are exempt from PAN requirements under certain conditions.
SEBI’s August 24, 2023, circular mandates FPIs to disclose detailed information on ownership and control if they hold more than 33% of their Indian equity AUM in a single corporate group or have over INR 25,000 crore of equity AUM. These disclosures are necessary to benefit from the relaxed investment rules.
The regulatory shift addresses long-standing concerns about potential market manipulation by NRIs and OCIs, rooted in the 2001 stock market scam involving Overseas Corporate Bodies (OCBs). The new guidelines reflect a balance between tightening oversight and encouraging foreign investment by leveraging the robust regulatory environment of IFSCs.
This move is expected to boost foreign direct investment inflows and aligns the KYC and due diligence processes of IFSC Fund Management Entities with domestic standards, ensuring effective monitoring and compliance with anti-money laundering regulations.
