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May 1, 2024

Sebi Boosts NRI Investments and Passive Funds with Key Reforms at GIFT City

In a significant move, the Securities and Exchange Board of India (Sebi) has opened new avenues for non-resident Indians (NRIs) and Overseas Citizens of India (OCIs) by allowing them to own up to 100 per cent in global funds at the GIFT City. This decision, announced recently, aims to facilitate greater flows from the Indian diaspora into domestic stocks and enhance the fund ecosystem at the International Financial Services Centre (IFSC).

Previously, NRIs and OCIs were restricted to owning not more than 50 per cent in a foreign portfolio investor (FPI). However, with the revised regulations, NRIs and OCIs can now enjoy full ownership, provided they submit copies of their PAN cards along with their economic interest in the FPI.

Market experts view this move as a dual advantage, expecting it to boost investments at the GIFT City and attract genuine flows from overseas Indians into the Indian stock market. Suresh Swamy, a partner at Price Waterhouse & Co, highlighted that the conditions for increased participation are carefully crafted to balance flexibility with regulatory risk.

Moreover, Sebi has extended its support to passive funds by allowing them to increase exposure to group companies of sponsors from 25 per cent to 35 per cent. This adjustment is subject to certain conditions and aims to help passive funds replicate underlying indices more accurately, especially where group companies constitute a significant portion of the index. Notably, this flexibility is applicable only to indices specified by Sebi and is capped at 35 per cent investment.

The approval for increased exposure to group companies is expected to benefit entities like Jio Financial Services’ mutual fund unit, considering Reliance Industries’ significant weightage in several indices.

In a bid to strengthen regulations and prevent market abuse, Sebi has directed fund houses to implement institutional mechanisms to curb front-running. This move is a response to instances of market manipulation and aims to increase surveillance and internal controls within asset management companies. The regulator will hold the management of these companies accountable and mandate the establishment of whistleblower mechanisms.

Sebi has also approved an option for venture capital funds to migrate to an alternative investment fund (AIF) structure to handle unliquidated assets after their tenure. This decision aligns with Sebi’s earlier framework for AIFs dealing with similar situations.

Furthermore, in a move to promote non-institutional investors in the bond market, Sebi has given the green light for the issuance of non-convertible debentures and non-convertible redeemable preference shares through private placement mode at a reduced face value of Rs 10,000, subject to the appointment of a merchant banker.

These reforms mark a significant step towards attracting more investments, both from NRIs and institutional players, into the Indian financial market. By enhancing regulations and offering greater investment opportunities, Sebi aims to foster growth and stability in the country’s financial ecosystem.

Jhumpa Lahiri

Jhumpa Lahiri

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