30 officials from Foreign Portfolio Investors (FPIs) as well as custodians of a few offshore funds met with SEBI Chairman, Ajay Tyagi this week and made an appeal to eliminate the regulation that mandates most offshore funds to be broad-based. This means the fund should have a minimum of 20 investors and a single holding should not exceed 49%.
FPIs form majority of the investor group in the Indian stock exchange. They are also not happy about the rule wherein directors and senior fund management officials of these overseas funds must submit their passport copies, social security numbers and other national ID proofs.
SEBI has always favoured ‘broad-based’ funds to reduce round-tripping (to sell an idle asset after agreeing to buy it back later at almost the same money).
Here, many investors use this tactic through FPI that lead to stock price manipulation. So the preference for this criteria. Seeking sensitive information will not always bode well with overseas parties who come from a place where such practices don’t exist.
FPI representatives countered this concern of the regulator by saying since SEBI has made it compulsory for funds to divulge their Ultimate Beneficial Owners (UBOs), they can access every investor information anyway, which negates the need for the funds to be broad-based.
Over 70% of the FPIs (listed as Category-II funds) must fulfil the broad-based guidelines while the KYC norm for disclosing personal details of senior fund officers is applicable to Category-II funds in ‘high-risk jurisdictions’. On the other hand, Category-III FPIs comprise hedge funds, non-resident people and family offices.
Based on individual internal constraints, the number of high-cost jurisdictions differ from one custodian bank to another. They don’t apply to Category-I FPIs like govt-owned institutions. FPIs, especially those in the nascent stage, find it tough to deal with added compliance burden of broad-based rules.
Eliminating this criterion would provide them with a much-needed breather.
“The broad base criteria from regulatory perspective may continue to stay relevant since it’s an important risk diversification tool for a Category II FPI which ensures that all the monies are not received from concentrated investor accounts”, opines Tejesh Chitlangi of IC Universal Legal.
Whether SEBI will consider this request is yet to be seen because every jurisdiction has its own norms and need not change it to suit people from other jurisdictions.