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The Curious Case of Foreign Funding

Ali Azar

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The stock market has been volatile in the last few days. After a stellar August month, macro concerns have taken over in September and we are seeing a correction, perhaps more than what we bargained for. Adding to this volatility is the upcoming deadline of SEBI’s controversial April 10th circular which seeks to place curbs on persons of Indian origin (PIO’s) and non-resident Indians (NRI’s) from controlling foreign portfolio investment (FPI) coming into India.  An FPI (from an Indian context) is an investment vehicle in which money is pooled by foreign investors and enables them to purchase stocks, bonds or other financial assets in India. FPI’s investing in India can be run and managed by various persons including foreigners, NRI’s, PIO’s, OCI’s (overseas citizens of India) etc.

FPI rules state that NRI’s and PIO’s are not allowed to be the persons who ultimately own or control an FPI (also called as beneficial owners (BO’s) of FPI funds). The only parameter to classify a person as a beneficial owner (thereby disqualifying the FPI if BO’s are NRI’s and PIO’s) was based on economic interest. So, FPI’s investing in India, with NRI’s and PIO’s as their fund managers would position themselves in a such as way, so as to avoid being classified as beneficial owners according to Indian FPI regulations. The April 10th circular published by SEBI seeks to include a greater number of FPI fund managers within its definition of beneficial owners, thereby disqualifying the fund from investing in India. It states that beneficial ownership should not be determined based on economic interest only but should also consider who controls the fund and further goes on to mention that in cases where there are no visible beneficial owners, the senior management officials will be considered as beneficial owners. The circular also enhanced know your customer (KYC) norms for FPIs.

This stance taken by SEBI created panic amongst several India dedicated FPIs, since a lot them were managed by Indians or Indian entities. FPI lobby group AMRI (Asset Manager’s Roundtable of India) cried foul and predicted that the move by the market regulator could lead to 75 billion $ worth of investments being under threat and called for immediate intervention by regulators. Fund houses that were affected are already considering winding up some of their operations, creating strategic partnerships and change in shareholding to avoid being on the regulator’s radar.  At a time when foreign exchange is worth its weight in gold amid rapidly declining rupee, widening current account deficit and rising oil prices, can we really afford to risk an avenue for inflow of much needed foreign funds?

The government and market regulator was quick to come out in defence of their actions with Economic Affairs Secretary S C Garg stating that there is nothing new in the circular and that the deadline has been extended by two months until December. Market regulator SEBI termed claims of 75 billion $ worth of outflow as “preposterous and highly irresponsible”. Making a comparison between the Indian position and regulations concerning FPI investments elsewhere, Nandita Agarwal Parker, president of the AMRI noted “The world over, people of Chinese origin manage a lot of Chinese funds. Now, the Nigerians or the Russians can manage funds investing into India, but those of Indian origin can’t. No country in the world does this and we are having a tough time explaining to institutional investors why India is doing this,”

With general elections around the corner, the Modi government perhaps wants to block off all possible sources of funding for opposition parties in an effort to cripple them. When one analyses it from this angle, perhaps it is not an irrational move to strictly scrutinize all avenues of foreign fund flows into the country whether it be by way of FPI or otherwise. A relevant statement made by Nishith Desai of Nishith Desai & Associates, a reputed law firm was “The government may be keen to fix money laundering and nobody questions the need for KYC norms, but this circular also ends up treating all NRI fund managers as possible conduits for money laundering”. The government’s official stance on these measures taken is to prevent round-tripping of money and to curb tax evasion.

Perhaps in a move to assuage market participants not to panic, market regular SEBI in an unexpected move decided to hedge its bets and may dilute some provisions from the circular and is also mulling exempting PIOs from the ambit of its KYC and easing investment norms for NRI’s. It also referred the matter to H.R. Khan led committee, set up for an easing of FPI access norms. With the final decision yet to be known, the actions of the regulator are being closely monitored not only by the foreign investor community but also the country at large who are very keen to observe as to what length the Modi government will go to drip dry its opposition.

Business

Sensex drops over 200 points; Nifty below 11,100

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Mumbai | The BSE Sensex dropped over 200 points in early trade Monday on increased selling of realty, consumer durables, auto and banking stocks, amid weak Asian cues and surging global crude oil prices. The depreciating rupee also dampened investor sentiment.

The 30-share index, after opening positive at 36,924.72, quickly succumbed to selling pressure and fell by 210.22 points, or 0.57 percent, to 36,631.38 in early trade. The gauge has lost 1,249.04 points in the previous four sessions.

Similarly, the NSE Nifty declined by 65.50 points, or 0.59 percent, to 11,077.60 after a touching a high of 11,170.15. Sectoral indices led by realty, consumer durables, auto, banking and healthcare were trading in the negative zone, falling up to 1.66 percent.

Major losers were Bharti Airtel, Maruti Suzuki, Hero MotoCorp, M&M, Kotak Bank, Adani Ports, HDFC, ICICI Bank, Yes Bank, Axis Bank, PowerGrid and IndusInd Bank, shedding up to 2.32 percent.

Shares of Dewan Housing Finance Corporation rebounded nearly 25 percent to Rs 438.75 after the company stated that it had not defaulted on any bonds or repayment nor had there been any single instance of delay on any of its repayment of any liability. The company’s shares had tumbled 42.43 percent in the previous session on Friday following massive selling over fears of a liquidity crisis.

Brokers said market sentiment remained weak in the absence of any encouraging factor and fresh weakness in the rupee, coupled with rising global crude oil prices, which again went past the USD 79 per barrel mark. The rupee depreciated 29 paise to 72.49 against the US dollar at the interbank forex market.

Foreign portfolio investors (FPIs) bought shares worth a net of Rs 760.70 crore, while domestic institutional investors (DIIs) made purchases to the tune of Rs 497.03 crore on Friday, provisional data showed. Elsewhere in Asia, while Japan and Chinese markets were shut Monday on account of a public holiday, Hong Kong’s Hang Seng fell 1.29 percent. The Dow Jones Industrial Average, however, gained 0.32 percent to end at record high Friday.

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Gold slumps Rs 250 on weak global cues, low demand

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New Delhi| Gold prices plunged by Rs 250 to Rs 31,450 per 10 grams at the bullion market here on Saturday, tracking a weak trend overseas amid easing demand from local jewellers.

However, silver hardened by Rs 70 to Rs 38,150 per kg on scattered enquiries from industrial units and coin makers.

Marketmen said sentiment turned bearish after gold prices fell in global markets as the dollar firmed on persistent concerns about an escalating trade war between the US and China.

Globally, gold fell 0.68 per cent to USD 1,198.70 an ounce and silver 0.38 per cent to USD 14.25 an ounce in New York in Friday’s trade.

Fall in demand from local jewellers and retailers at the domestic spot markets too put pressure on gold prices, they said.

In the national capital, gold of 99.9 per cent and 99.5 per cent purity drifted down by Rs 250 each to Rs 31,450 and Rs 31,300 per 10 grams, respectively. The precious metal had gained Rs 50 yesterday.

Sovereign, however, remained flat at Rs 24,500 per piece of eight grams.

On the other hand, silver ready advanced by Rs 70 to Rs 38,150 per kg and week-based delivery by Rs 15 to Rs 37,590 per kg.

Silver coins, however, were unaltered at Rs 72,000 for buying and Rs 73,000 for selling of 100 pieces.

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Sensex rallies over 300 pts, Nifty reclaims 11,300-mark

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Mumbai | The BSE Sensex rebounded over 300 points in opening trade Friday on value-buying in select bluechip stocks amid a firm trend in the global market on easing trade war concerns.

Sustained buying by domestic institutional investors and a strengthening rupee also supported the recovery. The 30-share BSE index recovered by 305.88 points, or 0.82 percent, to 37,427.10 in early trade. The stock market was shut Thursday on account of Muharram.

The Sensex had lost 969.42 points in the previous three sessions. The NSE Nifty went past 11,300 to trade at 11,318.50, gaining 84.15, or 0.75 percent.

Sectoral indices, including metal, oil and gas, PSU, power, infrastructure, healthcare, consumer durables, FMCG, capital goods, auto and banking stocks, rose up to 1.62 percent.

Major gainers were Tata Steel, ICICI Bank, Axis Bank, Asian Paints, M&M, NTPC, Tata Motors, HDFC, ITC, Coal India, Bajaj Auto, SBI, RIL, HDFC Bank and Kotak Bank, rising up to 3.76 percent.

While, Yes Bank was the top the losers in the Sensex pack by plunging 19 percent after the RBI asked its managing director and CEO Rana Kapoor to step down after an extended term till January 31, 2019. Other losers were Infosys, HUL and TCS, falling up to 0.46 percent.

Meanwhile, domestic institutional investors (DIIs) made purchases worth a net of Rs 1,201.30 crore, while foreign portfolio investors (FPIs) sold shares worth a net of Rs 2,184.55 crore Wednesday, provisional data showed. Overseas, most Asian shares were trading higher, tracking positive closing in the US market overnight.

Shanghai Composite Index was up by 0.90 percent, Hong Kong’s Hang Seng rose 1 percent. Japan’s Nikkei too inched 0.50 percent higher after a data release earlier showed that the country’s nationwide core consumer price index for the month of August rose 0.90 percent compared to a year ago. The US Dow Jones Industrial Average ended 0.97 per cent higher Thursday.

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