The finance ministry is learnt to have impressed upon the Securities and Exchange Board of India (Sebi) to keep in mind the potential impact on broader financial market stability, apart from views of various stakeholders, while reviewing its April 10 circular on the beneficial ownership of foreign portfolio investors (FPIs).
“There is already some turmoil in the financial markets, primarily due to external factors. The rupee volatility has caused enough anxiety, although the Indian currency is still performing much better than many peers. The spill-over effect of a global trade war can’t be ruled out. So despite the good intentions behind the circular, Sebi may also see the potential impact on market stability and the timing of a step,” said an official source aware of the development. The final call, however, will be Sebi’s, as the regulator is “experienced and wise enough to handle such issues”, the source told FE.
Sebi on Wednesday said it would review the matter once it receives the recommendations of the HR Khan committee, which has already heard various stakeholders. It has also consulted the finance ministry. “Based on these inputs, Sebi would review the matter and shortly take a holistic view,” the regulator has said.
Earlier this week, Asset Managers Roundtable of India (AMRI), an investor lobby group, warned that Sebi’s new KYC norms in the circular could lead to capital outflows of $75 billion and hit the domestic currency and stocks. The rupee has weakened 6.3% against the dollar in the past three months and over 12.5% since January, and the FPIs have already turned net sellers of stocks in 2018 from net buyers last year.
Although Sebi has termed “preposterous and highly irresponsible” the claim of such massive outflows due to the provisions of the April circular, its promise to review the circular signals the regulator is willing to accommodate pragmatic views on the matter. On Tuesday, economic affairs secretary Subhash Chandra Garg, too, downplayed fears of capital outflows, saying the directive has no “immediate implications”.
Sebi has already extended the circular’s deadline to December 31 for providing details on the beneficial owners — or the natural persons who ultimately own or control foreign portfolio investors (FPIs).
According to analysts, the circular imposes curbs on such offshore funds managed by non-resident Indians (NRIs), overseas citizens of India, persons of Indian origin and resident Indian institutions (RIs). They have said NRIs and RIs handle funds worth $75 billion of the $450 billion FPI investments in India. The Sebi circular is purportedly aimed at curbing money laundering by NRIs through such FPI structure.
Having hiked its benchmark short-term interest rate by 25 basis points in June, the US Federal Reserve had indicated two more increases were likely this year. Any more increase in the US interest rate would further pressure the rupee, although the domestic currency is still over-valued, according to the real effective exchange rate based on a basket of currencies of India’s 36 export partners.
As for volatility in the stock market, from net buyers in 2017, FPIs have turned net sellers and have sold stocks worth a net Rs 22754.29 crore in the secondary equity markets up to September 5 this calendar year, said analysts.
Providing some relief to FPIs, Sebi had on August 21 extended the deadline by two months till December for providing a list of beneficial owners, and assured them that issues raised will be looked into by the HR Khan-led expert group.
In its April circular, Sebi had also asked FPIs to disclose name and address of the beneficial owner; whether they are acting alone or together through one or more natural persons as group, tax residency jurisdiction, percentage of beneficial owner group’s shareholding capital or profit ownership in the FPI.