An FPI is barred from making fresh purchases of a stock on the floor of the exchange once its stake in the company exceeds 10%. This stems from the regulation under which the entire holding is treated as foreign direct investment (FDI).
A possibility of relooking at this regulation was recently discussed by the new committee which was constituted by the capital market regulator last month to make life easier for offshore portfolio managers trading on Indian bourses, two senior industry sources told ET.
An FPI is allowed to hold 9.99% stake in a single company. Holdings of multiple fund vehicles having common parent or control are clubbed to calculate the total stake. After a fund’s holding in a listed company crosses 10% – say, to 12% – it has five days to offload the extra shares to cut the holding to 9.99%. If it doesn’t, the entire stake (12% in this example) is categorised as FDI.
“Even if the FPI at a later point sells down to lower its holding to well below 10 % – say, 7% – the lower holding (i.e, 7%) is still considered as FDI. So, once a stake is classified as FDI, it continues to remain FDI. It’s a rigid rule and many think it should change,” said a senior official with an institutional broker.
When a fund is considered as an FDI shareholder in a company, it is restricted from buying more shares of the particular company from the market. Further purchase of the stock can only be through other avenues away from the exchange – like off market transaction, open offer and preferential allotment of shares.
“The committee, we understand, also took up the issue related to problems in execution of block deals due to slippages when the market gets a whiff of the transaction,” said a person who is familiar with the discussion.
Block deals are cut during a special trading window in the early trading hours at a price which is within a range of plus or minus 1% of the previous day’s closing price. “When information of a large block deal leaks out, other traders join and investors who were originally lined up as buyers end up getting little or no shares. This can be avoided if the price range (for block deals) is widened – for instance, in the Japanese market such deals can happen at a range of 6-7%. However, so far the regulator has not been keen on allowing larger price discounts as it felt such a practice would be against small shareholders,” said another person. “So, it is not clear how the committee would strike a balance. Anyway, it has just had its first meeting,” said the person.
Among other things, the committee is expected to look into simplification of the ‘know your customer’ (KYC) regime and on boarding of FPIs. The 15-member panel, constituted by the Securities and Exchange Board of India (Sebi) and chaired by former chief economic advisor K V Subramanian, is empowered to directly engage with the departments in the ministry of finance and the Reserve Bank of India (RBI). An FPI has to meet KYC standards laid down by Sebi and RBI for maintaining securities account and bank account, respectively. “Funds had suggested certain changes to the rules that RBI insists on,” said a source.
According to sections in the financial market, an easier FPI registration and renewal process would help if India is included in a leading global bond index following Russia’s omission from the benchmark index amid sanctions. “Overseas funds which allocate funds based on say the JP Morgan Bond Index would have to be given FPI licence. Though this may not be part of the committee’s agenda, it is possible that the government will await the committee’s recommendations before taking a final call on the issue of bond index inclusion,” said a senior research analyst.