SEBI Panel Proposes To Relax Foreign Fund Ownership Rules

NRIs can invest as FPIs in a fund if single holding remains under 25% and group holding under 50 percent, says market regulator.  

A worker cleans the glass of the Securities & Exchange Board of India in Mumbai, India. (Photographer: Adeel Halim/Bloomberg News)
A worker cleans the glass of the Securities & Exchange Board of India in Mumbai, India. (Photographer: Adeel Halim/Bloomberg News)

A panel set up by the market regulator Securities and Exchange Board of India has proposed a set of relaxations to its earlier foreign fund ownership rules, which had barred non-resident Indian investors to become beneficial owners in such funds. It has suggested that beneficial ownership criteria should be applicable for know-your-customer rules only and not for eligibility for foreign investors.

SEBI on April 10 this year had issued a circular that barred non-resident Indians, persons of Indian origin and overseas citizens of India from being a beneficial owner—an investor holding above a particular threshold. This had sparked concerns of fund restructuring or shut downs, which may consequently lead to large outflows from the Indian equity markets. SEBI released the panel’s interim report yesterday for public comments till Sept. 17

Bloomberg Quint had first reported it last week that SEBI panel is in favor of relaxing the rules.

It was brought to the notice of SEBI and the working group that PMLA (Prevention of Money Laundering) norms are for customer due diligence and need not apply for eligibility of foreign investors as Foreign Portfolio Investors.
SEBI Panel Report

The report was submitted by a panel headed by HR Khan, former deputy governor of the Reserve Bank of India.

“It is broadly the thinking of the group that the BO (beneficial ownership) criteria should be made applicable only for KYC and not as eligibility criteria for FPIs, including NRI, PIO and RIs,” said the Khan panel in its submission.

It also said that the clubbing of limits for foreign portfolio investors should be based on beneficial ownership.

What The Panel Suggests

1. Rule: SEBI’s April 10 circular said non-resident Indians can’t be beneficial owners of an overseas investment fund.


  • NRIs, OCIs and RIs can be beneficial owner of an FPI, subject to single NRI/OCI/RI holding is below 25 percent of the asset under management of FPI and aggregate holding is below 50 percent of assets under management.

2. Rule: A fund manager, if he or she is an NRI, OCI, RI, could not be in control of the foreign fund. A fund manager is typically in control when beneficial ownership can’t be defined in case of a diversified investor base.


  • NRI/ OCI and RI as investors should not be in control, however, NRI asset managers, OCI managers and RI as asset managers can continue to be in control.

3. Rule: PIOs could not be beneficial owner or in control of a foreign fund.


  • No restrictions on PIOs as the concept has also been done away in FEMA.

4. Rule: FPIs are currently allowed to invest up to 10 percent in a listed Indian company. The investment limit of FPIs will be clubbed if they have the same beneficial owner.


  • May be on the basis of common ownership of more than 50 percent, however, to be done away with for regulated public retail funds.

On Jurisdictions

It is recommended that SEBI and the Government of India develop a more evolved criterion for recognising high-risk jurisdiction. These exemptions for NRI, OCI, PIO and RI are only applicable for those countries who are part of International Organization of Securities Commissions, and are not red flagged by the Financial Action Task Force .

Expert Take

The Khan panel has addressed all the substantive issues and is a massive step in the right direction, Riaz Thingna, director at Grant Thornton Advisory Pvt. Ltd., told BloombergQuint. However, the operational issues of enhanced KYC for foreign funds will continue to pose challenges, he added.

“SEBI and the government of India should soon evolve a method to identify high risk jurisdictions because in the interim it would lead to unnecessary speculations,” he said.

Sandeep Parekh, managing partner at Finsec Law Advisors, agreed that the panel has addressed most of the issues and problems raised by FPIs managed by people of Indian origin.

“Primarily, it acknowledges that the rules of PMLA ‘look through’ should be used for identifying natural human beings and not as a source of restriction on investment. It also rationalised, or rather recommends, that a review of the definition of NRIs to include people who have left India generations ago be done,” he added.