Funds initiate corrective action to avoid last minute compliance issues with SEBI’s diktat

Almost a dozen foreign funds across geographies such as Singapore, Mauritius and the U.S., which invest in the Indian equity markets, have started restructuring their ownership and management structure to comply with the Securities and Exchange Board of India’s (SEBI) diktat that bars Non-Resident Indians (NRIs), among others, from acting as fund managers of foreign portfolio investors (FPIs).

According to people directly involved in the matter, some of the funds have initiated the process to change the key management personnel (KMP) managing the fund if such person falls in the category barred by the Indian capital market regulator.

The recent past saw two funds – one each from Singapore and Mauritius – with a cumulative corpus of nearly $500 million, change their respective KMP even as SEBI had said that it would review the contentious circular based on the consultations with the government and various market participants.

Further, lawyers dealing with such investors said that many more funds had initiated corrective action to avoid any last minute compliance issues, as any change in the KMP or the fund manager required an approval from all the offshore investors and thereafter refiling of many documents. This was a time-consuming process.

Tejesh Chitlangi, senior partner, IC Universal Legal, said that a large number of FPIs investing in India were facing problems as the senior managing official – an NRI or a PIO, in many cases – was identified as the beneficial owner.

‘To act or wait’

“As per the SEBI circular, since the beneficial owner cannot be an NRI or OCI, it has pushed lot of FPI structures in trouble. Currently, there is lot of anxiety and dilemma among FPIs concerned, whether to act on the dictum now or keep waiting for a relaxation at least till the extended compliance deadline is round the corner,” said Mr. Chitlangi.

NRIs, along with Person of Indian Origin (PIO) and Overseas Citizen of India (OCI), cannot manage FPI investments, and have time till December 31 to comply with the new framework.

While an industry body has pegged the potential outflows at $75 billion due to the SEBI diktat, the regulator has brushed aside such concerns.

Sandeep Parekh of Finsec Law Advisors is of the view that the concerns raised by FPIs are valid and the decision, if not reviewed, could lead to removal of persons of Indian origin from managing India-focussed funds.

“What started out as an attempt to zero in on the human beings behind corporate entities [a good move] has taken a broader filtering of money managed by brown people,” said Mr. Parekh, who was invited early this week by a SEBI panel for his views on the SEBI decision.

“The committee was extremely receptive to the practical problems arising from the circular. We are hopeful of a carve out of the problem areas,” said Mr. Parekh, who had earlier served as an executive director at SEBI.