SEBI new rule to impact foreign funds

The Securities and Exchange Board of India (SEBI) notified that only FPIs – Foreign Portfolio Investors located in FATF countries or managed by an enterprise based under FATF jurisdiction can deal in Participatory Notes.

Participatory Notes are financial instruments required by investors to invest in Indian stock markets without being registered with SEBI.

Effects of notification

The step will majorly affect funds from Mauritius and Cayman Islands. They are not FATF members and a major portion, 15 to 20% of FPI comes from these countries. Now these entities can neither issue nor subscribe to Participatory Notes.

In simple terms, SEBI says that to be registered under category – I FPI, the entity should be from a FATF member country. The category – II FPIs are not barred from accessing PNs. The category I funds include pension, sovereign wealth funds, endowment funds and funds from FATF member countries. Funds from non – FATF countries come under category II.

HR Khan Committee

The new rule is based on the HR Khan Committee’s recommendation. HR Khan Committee was formed by SEBI under chairmanship of former deputy governor of RBI to streamline FPI. The reforms initiated by SEBI based on the committee’s recommendation

  • It eased eligibility terms of FPIs and KYC norms.
  • NRIs, resident Indians are now allowed to be constituents of FPI if they own a share less than 25% of holding

Necessity of the step

The global economic scenario happening in different parts had great effect over Indian economy. It included

  • Since 2016, rupee value has depreciated over 16%. This implies that there is a risk of increased inflation
  • The small and mid – caps were tumbling. In October 2018, the small – cap index fell to 13,800 which was a 31% decrease. The mid cap index fell by 23%.
  • Fear of US sanctions over India importing oil from Iran.
  • Trade war between US and China
  • Rising crude oil prices

About FATF

FATF is Financial Action Task Force that monitors money laundering and terrorism funding all over the world. It also develops policies to curb money laundering and terror financing. It was established in 1989 G7 summit that was held in Paris.

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