FPI managers club: Indians not allowed

In fact, one fund manager told this journalist that he stormed out of a meeting with officials as he found the ban highly discriminatory and insulting.

"You are saying it is ok if a ‘gora’ manages the foreign portfolio investor (FPI) fund, but Indians like me can’t?” He asks not wanting to be named.

But this matter is not just about emotions. The numbers are equally big - Indian FPI managers claim $75 billion worth of equity investment may have to be unwound by the December 31, if the matter is not resolved.

For context, keep in mind that the 2017 market rally saw $30 billion dollars of FPI money being pumped into India.

So an outflow or even partial unwinding of $75 billion worth of investments definitely has the potential to cause serious tremors on the street.

At the heart of the matter is the identification of an FPI’s beneficial owner. Sebi wants all foreign funds to disclose their beneficial owners (BO).

This, the regulator said is required to prevent money laundering and round tripping of funds into the stock market.

So, how will an FPI fund’s beneficial owner be defined? The circular lays out three different thresholds: A beneficial owner is any person owning:

25 percent economic interest in the fund if the fund is set up as a company

15 percent economic interest in the fund if the fund is set up as a trust

10 percent economic interest in the fund if the fund is based in a “high risk jurisdiction”

(Don’t even bother asking what is a high risk jurisdiction – that’s a different grey area all together on which investors are seeking clarity)

According to the market regulator’s diktat, neither a resident Indian, nor a NRI, a PIO (Person of Indian Origin) or an OCI (Overseas Citizen of India) can be beneficial owner of a FPI fund.

But that’s not all. The final sledgehammer is the rule which said Indian-origin people can’t be senior managers of the fund even if they don’t have any significant economic interest and don’t cross the beneficial owner thresholds.

It's this particular point that has riled up the Indian fund manager community quite a bit.

“What this circular in effect means is that a Nigerian or Chinese or any other national can manage foreign money invested in India, but we can’t because we are Indians. This is shameful and discredits us as a community of professionals,” said Nandita Parker, managing partner of Karma Capital and also president of the Asset Managers Roundtable of India - a recently formed body of FPIs.

The circular may have aimed to crack down on black money and prevent money laundering, but did it really have to implement a blanket ban on Indian managers?

India has recently introduced several anti-tax evasion measures like GAAR or the General Anti Avoidance Rules.

We’ve overhauled and tightened our bilateral treaties with countries like Singapore, Mauritius and Cyprus to prevent their abuse and Sebi has cracked down on Participatory-Notes making KYC norms far more stringent to ensure transparency.

So is this fear of round tripping perhaps bordering on a bit of paranoia?

"While anti-money laundering and strict KYC measures are always welcome, we need to balance them with genuine investor interest. There is a risk that the circular in its current form throws the baby out with the bath water," said Sudhir Kapadia, national tax leader, Ernst & Young.

With the rupee at an all-time low, rising oil prices and a widening current account deficit, the last thing India perhaps needs is a flight of foreign capital from the country’s equity market.

The FPI managers body has reached out to both the market regulator and the union finance ministry hoping for a constructive dialogue.

The clock is ticking and many questions remain unanswered. One hopes these answers emerge well before the December 31st deadline.