As per the new regulations announced by the market regulator—Securities and Exchange Board of India (SEBI), the foreign funds flowing in from the regions other than the elite 39 members of the Financial Action Task Force (FATF) will be significantly impacted. The FATF, a policymaker, came into force in 1989 at the Paris summit of G7.
The FATF came into existence to curb money laundering activities. Major financial hubs such as Cyprus, Cayman Islands, and Mauritius are not a part of the FATF. The SEBI’s move might see Mauritius pushing its funds and businesses to Singapore. India had informed Mauritius that the country would not be classified as ‘high-risk’.
However, SEBI’s move is an indirect step towards applying high-risk rules on Mauritius and Cayman Islands. As per a notification of SEBI, only the FPIs located in the FATF regions would be permitted to trade participatory notes (PNs). These PNs are offshore derivatives with Indian futures, stocks, and other options as underlying instruments.
According to the regulations of SEBI, the category-I funds cover pension, pension funds, sovereign wealth funds, and funds from the FATF regions. The funds from the non-FATF regions are categorised under category-II. Investors from Mauritius cannot trade PNs until the funds are managed by entities from any of the FATF countries.
SEBI is yet to release its operating guidelines that provide insights on the kind of restrictions on non-FATF members. It includes disclosing the ownership of funds and the tax treatment on indirect transfer. The market watchdog is expected to announce guidelines shortly.
As per the latest FPI regulation which is framed on the basis of the committee headed by HR Khan, the regulated funds either have to originate from any of the FATF member countries or the investment/fund manager has to be from a FATF region. This move has worried investors in Mauritius, Cyprus, and the Cayman Islands.
Consolidating the categories of FPIs will be embraced by the industry but reclassifying FPI categories based on the FATF jurisdiction will not be certainly welcomed as it can disqualify investors based out of these major hubs.
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