SEBI’s ruling on the Beneficial Ownership norms

By Guest |  05-09-18 | 
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The market regulator’s decision to curb investments by non-resident Indians, or NRIs, has sparked a fair amount of outrage. Deepak Shenoy, the CEO of Capitalmind, a SEBI registered portfolio manager, shares his view on the subject.

The Securities and Exchange Board of India, or SEBI, has spooked a few people in a sweeping regulatory move that seems to penalize NRI fund managers.

Circular by SEBI on April 10 states that:

  • Every Foreign Portfolio Investor (A fund, a trust, a company, a partnership) should identify its Beneficial Owner (BO)
  • The BO is anyone who owns a 25% or more stake if the FPI is a company.
  • Or 15% if a partnership. Or 10% if shady country based FPI. And such.
  • You don’t have anyone who’s more than the threshold? Well…
  • In that case the fund manager (or the “senior managing official”) is the BO.

And there’s one part that’s clear: No Indian (resident, or NRI or OCI) can be a BO.

The message being, if you are an NRI don’t do things through the FPI route which masks you behind some company or such. Come straight to India, register as an NRI and invest.

The rules

India has some extreme rules for NRIs to invest in India. (Apart from maybe bank fixed deposits where they don’t even pay tax). They have to have a PIS account, pay much, much higher brokerage fees, pay capital gains taxes on every transaction (if you have an offsetting loss, too bad – that’s a tax collection nightmare) and so on.

Anyone who’s an FPI investor with 25% in a fund can just bring his/her investment down to below 25% or come in direct. Being 25% of an FPI means you’re loaded. So you can spend a bit of money getting some of the formalities done. Or choose to exit India.

The eccentricity

Let’s consider a fund manager, an Indian who understands the Indian market and mindset. He has raised money entirely from foreigners. No one owns 10% of his fund. He resides in Singapore.

It’s tough to invest in Vietnam without having some knowledge of Vietnam. Either you go there, or you find a guy who knows about investing in that country. Chances are that person is Vietnamese, which gives you confidence because hey, he should know about Vietnam if he’s Vietnamese. And then if he’s got a fund that invests in Vietnam, you invest in that fund, for his knowledge.​​​​​​​

Replace Vietnam with India in the paragraph above. Still makes sense.

Not to SEBI.

The rule is that if you’re a diversified fund, (no single person owns more than 25%) then your fund manager is considered the BO. And the BO cannot be Indian. If the fund manager is Indian, the fund is toast. Finito. Can’t invest.

Essentially, foreigners can’t invest in India through a fund managed by an Indian person. If a fund manager isn’t Indian – say he’s Vietnamese – then that fund can invest in India.

In fact, here’s the deal. There’s an ETF by iShares, which invests in Indian stocks. If the fund gets a manager who is an NRI in the U.S., that fund can’t invest in India. Some poor bloke can’t even apply for such a fund because oh goodness, Indian passport.


I fervently hope that SEBI actually wanted to plug a loophole but ended up creating a situation where lots of legal, legit funds will be denied access. They can plug this. But if they don’t, these funds will have to change their structure by December 31, 2018.

Winding up is possibly a last alternative. These funds might simply choose to have a different fund manager and use the Indian origin manager as a “consultant” instead. But now they have to tell all the investors they’re doing this, and some institutions (like pension funds) may decide to not allow such a change even if it’s only for regulatory needs, and that creates a lot of uncertainty. If such a restructuring can’t be done, they’ll have to shut their investments and go back home.

A lot of money comes through FPIs managed by Indians – some say $75 billion. (That’s only about 5 lakh crores, which is probably 20% of all FII investment in India). If they have to leave, it will be extremely disruptive.

It is imperative that SEBI resolve this issue.

The above version is edited from the original which appeared on

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