Insight 16 April 2020

Sebi awaits Centre’s stance on FPIs from China, other nations

Market regulator decides to hold off vetting foreign investments over inter-governmental implications.

The Securities and Exchange Board of India (Sebi) on Monday evening put in abeyance a decision taken earlier in the day that mandated vetting by the markets regulator of new funds coming in from neighbouring countries, including China. The regulator said that it is awaiting clarity from the government.
Minthas reviewed both communications, which also mention Nepal, Bangladesh, Pakistan, Sri Lanka, Myanmar, and Bhutan.

However, these countries have not invested in Indian companies through the stock market route. “These decisions have inter-governmental repercussions and are policy decisions that need the Indian government’s nod. So, Sebi has put its initial communication in abeyance. A fresh one may be issued once clarity from the government emerges,” said a person with direct knowledge of the matter.

Indices have been correcting and sharply falling across economies as the world reels under uncertainties caused by the covid-19 pandemic. This has made many bellwether stocks cheaper and affordable, for domestic and foreign investors. On Sunday, after Housing Development Finance Corp. Ltd (HDFC) said that People’s Bank of China (PBOC) had raised its stake in the home lender from 0.8% to 1.01% in the March quarter through open market purchases, many investors began voicing concerns whether some of these stocks had become susceptible to acquisition, through the foreign portfolio investment (FPI) route.

Sebi shot off an email, on Monday morning, to custodians to be complied with immediate effect.

The email read: “…(if) any new FPI applicant is coming from India’s bordering countries or the beneficial owner of the FPI applicant is from India’s bordering countries, registration should be granted only after Sebi’s approval in such cases…”

This implied that any such FPI applicant would face an additional layer of scrutiny. This is relevant mainly for China as it is the only neighbour that has funds registered with India to invest in Indian stock markets. However, by evening Sebi put the communication in abeyance because of inter-governmental implications.

China has 16 FPIs registered in India. Of them, 15 are in category I and have easier compliances, lower taxation, and disclosure requirements, while only one fund is in category II, which typically comprises hedge funds.

The big FPIs from China include PBOC, CIFM Asia Pacific Fund, China International fund management, Best Investment Corporation and Asian Infrastructure Investment. Only PBOC has over 1% stake in any listed firm, in this case HDFC, according to Bloomberg data. These funds have an investment of $1.1 billion in Indian firms, according to Bloomberg.

CIFM Asia Pacific Fund, a joint venture with JPMorgan Asset Management Co., holds 13.5% stake in Indian banks and infrastructure firms, among others. In nine companies it has just a little above 1%, which is the reporting threshold.

“In the past I have not seen China as a significant investor in FPI. I don’t think they will focus on specific sectors. They will invest in top tier brands across sectors. They will bet on top consumer companies, top infra companies, top banks, and may be top IT firms,”said Ajit Deshmukh, managing director and cohead, investment banking, Equirus Capital.

Sebi and the finance ministry have been making it easier for Mauritius-based funds to invest in Indian stocks. “This can lead to higher inflows into Indian equities and also increase the ease of doing business in India.”

Khushboo Chopra Head of Business Development, India

Other insights from Peter Nagle

Insight 13 April 2020
India’s Central Government specifies Mauritius as an eligible country for “Category 1 foreign portfolio investor”
Insight 9 April 2020
Sebi tweaks rules to stem outflow of foreign funds
Insight 14 July 2020
Sebi eases ownership rules for Gift City Exchanges