An FPI is prohibited from buying new shares on the floor of the stock exchange once its stake in the company exceeds 10%. This stems from the regulation under which all participation is treated as foreign direct investment (FDI).
A way to reconsider this regulation was recently discussed by the new committee set up by the capital markets regulator last month to make life easier for offshore portfolio managers trading on Indian stock exchanges, two senior industry sources told ET.
An FPI may own 9.99% of the shares in a single company. Interests in multiple fund vehicles that share a common parent company or control are aggregated to calculate the total stake. After a fund’s holding in a publicly traded company surpasses 10% — say 12% — it has five days to sell the additional shares to bring the holding down to 9.99%. If this is not the case, the entire share (12% in this example) is categorized as FDI.
“Even if the FPI sells at a later date to reduce its holding to well below 10% – say 7% – the lower holding (ie 7%) is still considered FDI. So once an investment is classified as FDI, FDI remains. It’s a rigid rule and many feel it should change,” said a senior official at an institutional broker.
When a Fund is considered an FDI shareholder of a company, it is prevented from purchasing further shares of that company from the market. Further purchase of the shares can only be made through other off-exchange avenues – such as over-the-counter transaction, open offering and preferential allotment of shares.
“The committee has also, to our knowledge, addressed issues related to block deal execution due to slippage when the market is aware of the transaction,” said a person familiar with the discussion.
Block Deals are closed during a special trading window in the early hours of trading at a price within a range of plus or minus 1% of the previous day’s closing price. “When information about a large block deal leaks out, other traders join in and investors who initially 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 example, in the Japanese market such deals can take place in a range of 6-7%. So far, however, the regulator hasn’t been keen on allowing bigger discounts, believing such a practice would offend small shareholders,” said another person. “So it’s not clear how the committee would strike a balance. Anyway it just had its first session,” the person said.
Among other things, the committee is expected to explore simplifying the know-your-customer (KYC) regime and boarding FPIs. The 15-member body, made up of the Securities and Exchange Board of India (Sebi) and chaired by former Chief Economic Adviser KV Subramanian, is empowered to work directly with Departments of the Treasury and the Reserve Bank of India (RBI). . . An FPI must comply with the KYC standards set by Sebi and RBI for maintaining securities accounts and bank accounts, respectively. “Funds had proposed certain changes to the rules that the RBI insists on,” a source said.
According to parts of the financial market, a simpler FPI registration and renewal process would help if India were included in a leading global bond index after Russia was removed from the benchmark index due to sanctions. “Foreign funds that allocate funds based on, for example, the JP Morgan Bond Index would need to obtain an FPI license. While this may not be part of the committee’s agenda, it is possible that the government will await the committee’s recommendations before making a final call on the issue of bond index inclusion,” said a senior research analyst.
https://economictimes.indiatimes.com/markets/stocks/news/review-of-holding-rule-likely-to-give-fpis-more-room-on-indian-bourses/articleshow/94385643.cms FPI: Review of holding rule likely to give FPIs more room on Indian bourses