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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.

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Canada defends Huawei arrest after markets wobble

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Huawei

Montreal | Canada on Thursday defended its arrest of an executive of Chinese tech giant Huawei on a US extradition request after markets wobbled on fears of fresh friction between Washington and Beijing. With China demanding the release of Huawei chief financial officer Meng Wanzhou, Canadian Prime Minister Justin Trudeau said officers who arrested her on Saturday as she was changing planes in Vancouver had acted on their own.
“I can assure everyone that we are a country (with) an independent judiciary,” Trudeau told a tech conference in Montreal.  “And they took this decision without any political involvement or interference.” Citing a court-ordered publication ban sought by Meng, Trudeau declined to comment further on the case, which according to a US senator was brought over Huawei’s activities in Iran.

The arrest took place on the same day that the US and Chinese presidents, Donald Trump and Xi Jinping, had met for a long-awaited summit in Buenos Aires and spoken of easing an intensifying trade row. Markets were chaotic over news of the arrest. On Wall Street, the broad-based S&P Index closed down 0.31 per cent after making up steep early losses. “The concept of getting a quick resolution is fading,” Art Hogan, chief market strategist at B. Riley FBR, said of the trade tensions between the world’s two largest economies.

China said that Meng — the daughter of Huawei founder Ren Zhengfei, a former engineer in China’s People’s Liberation Army — had violated no laws in either Canada or the United States. “We have made solemn representations to Canada and the US, demanding that both parties immediately clarify the reasons for the detention, and immediately release the detainee to protect the person’s legal rights,” Chinese foreign ministry spokesman Geng Shuang said in Beijing. Huawei also said in a statement that it was compliant with “all applicable laws and regulations where it operates.”

Huawei’s affordable smartphones have made strong inroads in the developing world, but the company has faced repeated setbacks in major Western economies over security concerns. Trump’s national security adviser, John Bolton, acknowledged that he knew that Canada was planning to arrest Meng on Saturday just as all eyes were on the summit in Buenos Aires. “I knew in advance. This is something that we get from the Justice Department,” Bolton told National Public Radio. He said he was not sure whether Trump — who had trumpeted his summit with Xi as “amazing and productive” as he flew back to Washington — was also aware. “These kinds of things happen with some frequency. We certainly don’t inform the president on every one of them,” he said of the arrest.

Bolton also declined to discuss specifics over Meng’s arrest, saying it was a matter for law enforcement. “But we’ve had enormous concerns for years,” Bolton said, “about the practice of Chinese firms to use stolen American intellectual property, to engage in forced technology transfers, and to be used as arms of the Chinese government’s objectives in terms of information technology in particular. So not respecting this particular arrest, but Huawei is one company we’ve been concerned about,” he said.

Senator Ben Sasse earlier linked Meng’s arrest to US sanctions on Iran, which Trump is trying to squeeze economically after withdrawing from a denuclearisation deal. CNN, quoting an unnamed official, said that the United States saw the arrest as providing leverage in trade talks. But White House trade advisor Peter Navarro denied Meng’s detention was linked to the US-China dialogue. “It’s pretty simple,” he told CNN, “The two issues are totally separate — the trade negotiations and this arrest. The Justice Department acts on an independent track. The coincidence of the arrest happening in the same time frame was just that.”

Canada was bracing for a fallout in relations with China, which has been increasingly willing to punish countries it sees as countering its interests. Canada’s cyber security chief said the country could face retaliatory cyber attacks. “I think one of the key things is that we always have to be resilient no matter what the possible trigger could be,” Scott Jones, director of the Canadian Centre for Cyber Security, told a press conference.

Meng is scheduled to appear in court on Friday for a bail hearing. Trump and Xi, who were in Argentina for a summit of the Group of 20 major economies, had agreed to set up negotiations to discuss US concerns over China’s trade barriers. In turn, Trump agreed to hold off on raising tariffs from 10 to 25 per cent on USD 200 billion worth of Chinese goods starting in the new year.

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Sensex dives 572 points as Huawei arrest roils global markets

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Huawei

Mumbai | Benchmark Sensex buckled under selling pressure for the third straight day on Thursday, in step with a global sell-off triggered by the arrest of a top executive of Chinese telecom giant Huawei in Canada.

Asian markets nosedived after Huawei CFO Meng Wanzhou, who is also the company founder’s daughter, was arrested in Canada for extradition to the US for suspected Iran sanctions violations, dealing another blow to US-China relations.

The BSE Sensex plunged 572.28 points, or 1.59 per cent, to close at 35,312.13. Similarly, the broader NSE Nifty fell 181.75 points, or 1.69 per cent, to 10,601.15. All sectoral indices on the BSE and NSE ended in the red, led by metal, oil and gas, pharma and financial stocks. Sun Pharma was the lone gainer in the 30-share Sensex pack. A weakening rupee, which plunged below the 71 per dollar mark intra-day, and fresh foreign fund outflows further dented investor sentiment, analysts said.

“Capital markets had a rough day, as they are trying to navigate too many data points such as re-emergence of sharp weakness in Indian rupee, upcoming OPEC meeting outcome in terms of production cut, and upcoming results of five state assembly elections. The nervousness is quite evident, as there is sharp sell-off across the industries, and especially in those stocks where there are corporate governance concerns,” said Jagannadham Thunuguntla, Senior VP and Head of Research Wealth), Centrum Broking Limited.

Top index losers included Maruti, Tata Motors, Reliance Industries, Yes Bank, Adani Ports, Bharti Airtel, Asian Paints, ONGC, HUL, Kotak Bank, IndusInd Bank and Axis Bank, falling up to 4.63 per cent. Sun Pharma rose 1.57 per cent.

On a net basis, foreign portfolio investors (FPIs) sold shares worth Rs 357.82 crore Wednesday, and domestic institutional investors (DIIs) were net sellers to the tune of Rs 791.59 crore, provisional data available with BSE showed. Crude oil prices slipped below the USD 60 per barrel level amid a crucial meeting of Opec members. Elsewhere in Asia, Korea’s Kospi fell 1.55 per cent, Japan’s Nikkei dropped 1.91 per cent, Hong Kong’s Hang Seng shed 2.47 per cent and Shanghai Composite Index tumbled 1.68 per cent. In Europe, Frankfurt’s DAX shed 2.36 per cent and Paris’ CAC 40 fell 2.21 per cent in early deals. London’s FTSE too slipped 2.50 per cent.

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Rupee falls 9 paise to 70.55 against US dollar in early trade

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Mumbai | The rupee depreciated by 9 paise to 70.55 against the US dollar in early trade Tuesday at the interbank foreign exchange, amid strengthening of the US dollar and rising crude oil prices.

Forex dealers said fresh demand for the American currency from importers amid rise in crude prices weighed on the domestic unit. Besides, investors were treading the cautious path ahead of the RBI policy decision. The rupee opened lower at 70.50 a dollar and dropped further to quote at 70.55, 9 paise down over its previous close.

On Monday, the local unit snapped its four-day rising streak and dropped by 88 paise, its biggest single-day loss in more than three months, to close at 70.46 against the US currency. Crude prices are on a rebound after Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman agreed to extend their agreement to limit production to arrest a slump in global prices. Crude oil prices surged over 1.07 percent to USD 62.35 per barrel in global markets.

Traders said fresh foreign inflows restricted the decline in the local unit. Foreign institutional investors (FIIs) made fresh purchases worth Rs 293.12 crore Monday, as per provisional data. The BSE benchmark dropped over 100 points in early trade Tuesday amid mixed cues from other Asian markets, rising crude prices, weak rupee and heavy selling by foreign investors.

The 30-share index was trading 133.27 points, or 0.37 percent, lower at 36,107.73 at 0945 hrs. In a similar movement, the NSE Nifty was trading 31.20 points, or 0.29 per cent, down at 10,852.55.

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