The board also cleared a proposal to simplify norms for passive schemes of domestic mutual funds allowing exposure to securities of group companies of the sponsor.
FPI
The regulator said such FPIs with NRIs and OCIs as clients should be based out of International Financial Services Centres (IFSCs) in India and regulated by the International Financial Services Centres Authority (IFSCA).
“The flexibility for such increased participation shall be subject to certain conditions to manage regulatory risk,” Sebi said in a press release after the voard meeting.
It would allow 100% contribution limits provided FPIs submit copies of PAN Cards of all their NRI and OCI investors, along with their economic interest in the FPI to the custodians. If an investor doesn’t have a PAN, the FPI should give a suitable declaration along with other prescribed identity documents. Similar disclosures would also be required in case of indirect holding in the FPI through firms or vehicles that are majority controlled by NRIs and OCIs on a look through basis, Sebi said. “SEBI’s decision to permit upto 100% NRI and OCI participation, from the current less than 50% permissibility exclusively for IFSCA regulated FPIs, will augur well for onshoring of India focused offshore public market funds in IFSCs,” said Tejesh Chitlangi, joint managing partner, IC Universal Legal.
Also, funds set up in IFSC, desirous of having upto 100% contribution in their corpus from NRIs and OCIs have to ensure diversification of investor base and investments.
Mutual Funds
The Sebi board also approved a proposal to streamline norms to create a level playing field for all asset management companies by allowing equity passive schemes to take exposure up to the weightage of the constituents in the underlying index.
This exposure would be subject to an overall cap of 35% investment in the group companies of Sponsor.
At present, mutual fund schemes are not allowed to invest more than 25% of their net asset value in group companies of the sponsor.
This restricts the passive funds to effectively replicate the underlying index, in cases where group companies of sponsor comprise of more than 25% in the index.
This also puts such fund houses to a relative disadvantage as compared to other asset management companies who may not have a sponsor group company comprising more than 25% in the underlying index, Sebi said.
MF Front-Running
The board also cleared a proposal requiring asset management companies to have an institutional mechanism for deterrence of potential market abuse including front-running.
The move comes in the wake of recent front- running instances observed by Sebi in mutual funds.
The mechanism would consist of enhanced surveillance systems, internal control procedures and escalation processes to identify specific types of misconduct, the regulator said.
The board also approved exemption from the requirement of recording face to face communication, including out of office interactions, during market hours by dealers and fund managers. This will be made effective after implementation of the institutional mechanism by the asset management companies, Sebi said.
NCDs
On debt securities, the Sebi board approved a proposal to provide an option to the issuers to issue non- convertible debentures (NCDs) and non- convertible redeemable preference shares(NCRPS) through private placement mode at a reduced face value of Rs 10,000 along with the requirement to appoint a merchant banker.
The move is aimed to increase participation of non-institutional investors in the bond market.
Such NCDs and NCRPS would be plain vanilla, interest or dividend bearing instruments. However, credit enhancements would be permitted in such instruments, it said.
