MUMBAI : The border tensions with China, increased scrutiny of investments from China and Hong Kong is forcing foreign fund managers to look for alternate jurisdictions to route foreign money into India. Hong Kong with 111 registered foreign portfolio investors is an investment and a trade hub but continued lack of clarity on increased monitoring is leading to this jurisdiction losing favour with investors, said fund managers and experts.
“The finance ministry is in favour of increased checks on foreign portfolio investments (FPIs) from Hong Kong and China. The beneficial ownership threshold may be set at 10% of the fund size, which will lead to increased scrutiny. These jurisdictions could be considered as high risk jurisdictions, which currently is restricted to countries which are not compliant with anti-money laundering or terror funding norms," said a regulatory official declining to be named.
This is likely to be discussed on 25 June when the Securities and Exchange Board of India (Sebi) will hold its board meeting.
“If the Government decides to restrict FPI investments from border countries, it will be interesting to see whether the restrictions are placed only on funds setup in those countries or beneficial owners based in those countries or both. Also we need to see whether such FPIs will be completely prohibited from making fresh investments without Government approval or whether they will be allowed to invest freely subject to a lower than 10% cap. Treating these jurisdictions as high risk might not be sufficient to completely discourage investments since a fund from a high risk jurisdiction can still invest in India subject to a higher compliance and lower threshold of 10% for identifying beneficial owners," said Rajesh Gandhi, partner, Deloitte Haskin and Sells.
This continued uncertainty over funds coming in from Hong Kong and China has made fund managers a worried lot. China with only 16 registered FPIs with a little above $1.1 billion in investments is lot less worrisome as compared to Hong Kong which is an investment hub for investors based in Europe and the United States.
“We have been hearing about the increased scrutiny and checks on investments from these two jurisdictions but to-date they are yet to be notified. Our clients are calling us for clarity and we still don’t have all the answers. Changing jurisdictions is much more conducive. However, it comes with additional costs and operational constraints. We would need to wind up the entire fund, refund investors and then set up a new fund in the new jurisdiction with no guarantee that investors will continue to be with us," said a foreign fund manager, declining to be named.
The funds based in Hong Kong are either considering Cayman Islands, Delaware, Singapore or Mauritius as an alternate jurisdiction to set up their funds, said fund managers declining to be named.
“Determining fund jurisdiction is getting increasingly challenging. Mauritius is yet to resolve its FATF (financial action task force) ‘grey’ and EU ‘black’ situations. Hong Kong has been tagged with China, that has its own repercussion, still unfolding from an India and global perspective. Cayman Islands is in the process of adding another expensive and onerous layer of regulations on Funds managed there. Only bright spot seems to be Singapore, where the Variable Capital Company (VCC) regime has been well received by the industry," said Richie Sancheti, leader-investment funds, Nishith Desai Associates.
VCC is a legal entity which allows fund managers to re-domicile their existing overseas investment funds with comparable structures by transferring their registration to Singapore.
According to Srini Sriniwasan, managing director, Kotak Investment Advisors, India should also use this opportunity to onshore trading.
“We are at a stage that asset managers are considering moving out of Hong Kong because of the changing geo-political scenario. Their first preference is still to go to either Singapore or Tokyo. However, asset management is purely a service based industry, the money can be managed from anywhere and can be pooled in from anywhere, in this context we should consider creating a conducive ecosystem in India so that these trades are onshored and India is considered as a viable option for asset managers to set up structures," said Srinivsan.
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