PremiumThe Securities and Exchange Board of India (Sebi) last month sent out letters ordering as many as 26 foreign funds to shut down. This is not the first time that India’s policy changes have toyed with foreign investor sentiment. Mint examines the changes:
The Securities and Exchange Board of India (Sebi) last month sent out letters ordering as many as 26 foreign funds to shut down. This is not the first time that India’s policy changes have toyed with foreign investor sentiment. Mint examines the changes:
What is the latest controversy?
Sebi, in 2014, came up with new rules for foreign investors to lower the compliance requirement. It switched from a foreign institut-ional investor (FII) regime to a foreign portfolio investor regime (FPI). But investors had to be from the International Organization of Securities Commissions (IOSCO) jurisdictions. Existing funds were to be grandfathered. A subsequent clarification in a frequently asked question (FAQ) format, in 2016, said even when a fund expires, it can continue in Indian markets after paying conversion fee. Later, in February, Sebi backtracked. Thus, funds from non-IOSCO jurisdictions need to be shut down.
Why should we be concerned?
For now, 26 funds are impacted. However, the number can increase as it is a policy change and will impact funds from other non-IOSCO jurisdictions, too. Foreign funds often structure their funds from the FAQs issued by regulators. Sebi is now saying it goes by its regulations and not the FAQs. Investors are, therefore, worried. Canada, which is one of the countries whose funds are affected, is the seventh largest in terms of foreign flows into India. It has strong anti-money laundering norms. If a country such as Canada can be impacted, one wonders what could happen in the case of other countries.
What part of flows from Canada is impacted?
Fresh fund registrations are facing more scrutiny even when previous funds have had a good track record. Canada has four agencies that regulate financial firms in different provinces. Two are non-IOSCO signatories. Funds regulated by Alberta Securities Commission and the British Columbia Securities Commission are not eligible to invest in India.
What were the earlier missteps?
In last eight years, there have been at least four instances where foreign investors faced either compliance or tax changes. In 2015, 300 foreign investors were slapped with a minimum alternate tax demand, an additional tax rate of 20% on long-term capital gains, which was zero earlier. It was rolled back. In April 2018, Sebi issued a beneficial ownership circular proposing that NRIs can-not be beneficial owners of a fund investing in India. In 2019, the budget proposed levying a surcharge on FPIs registered as trusts. The Centre rolled it back.
What is the way forward?
Such departures from known policy stance do not augur well for foreign investor sentiment. At a time foreign investors are net sellers from Indian markets, policy stability is much needed. In this peculiar case of Canada funds being caught in the cross hairs, experts feel the focus should be on strong anti-money laundering and terror financing prevention norms. Being an IOSCO jurisdiction enables an easier exchange of information. However, with India’s insistence on knowing beneficial owners, IOSCO signatory is a mere enabling factor.
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