Sebi gives itself powers to grant exemptions to FPIs

Mumbai: The Securities and Exchange Board of India (Sebi) can now use special powers to relax compliance requirements for foreign funds. The capital markets regulator's board has been empowered to give overseas investors leeway in the event of inadvertent lapses while investing in the country.

Currently, there are no provisions in the law to provide exemptions to foreign portfolio investors (FPIs). The regulator, however, has powers to provide special exemptions to listed companies, fund houses and other market entities. In the board meeting held on December 28, Sebi gave itself the flexibility to amend the rules for FPIs.

According to the minutes of the board meeting, an unnamed foreign fund failed to meet NRI (Non-Resident Indian) ownership norms in December 2020. The rules mandated the fund to offload all its India positions within six months ending June 30, 2021. While the fund offloaded most of its shares, it could not exit some of the investments since those shares were locked in. The fund had approached Sebi for an exemption. The regulator however could not allow it because of the limitation in the regulations. The Sebi board has fixed this gap.

"There have been instances in the past where FPIs who have inadvertently breached some non-material provisions of the FPI regulations and in spite of acknowledging them as non-material Sebi felt constrained in granting any exemption since the regulations lacked such power to Sebi," said Siddharth Shah, partner, Khaitan & Co. "From an ease of doing business and investing in India, such regulatory discretion is a necessity."

According to the minutes of the board meeting, Sebi said that the step was necessary "in the interest of investors and securities markets and for the development of the securities markets". An email sent to Sebi remained unanswered.

"The proposed rules will permit Sebi, basis formal application made by the FPI, to excuse enforcement of breaches arising from factors beyond the FPI's control," said Richie Sancheti, Partner, Algo Legal. "Such power to exempt enforcement of the law is of wide coverage and are more powerful from the current informal guidance mechanisms where Sebi only issues its interpretations on the position of law."