Money
Mint Explainer: How easing NRI caps in Gift City funds will boost fund launches
Summary
- Sebi's removal of the 50% cap on investments from overseas Indians in Gift City funds eliminates a major hurdle, enabling rapid fund launches
- It enhances the appeal of Gift City-domiciled funds, offering a competitive advantage and simplifying investment options for overseas Indian investors.
Asset management companies (AMCs) in Gift City, Ahmedabad, are set for a major boost following a crucial regulatory change by the Securities and Exchange Board of India (Sebi). By eliminating the restrictive 50% cap on investments from Indians abroad in India-focused funds, Sebi has removed a significant hurdle that has long impeded the growth potential of these funds.
For years, AMCs faced a stringent requirement: for every dollar accepted from non-resident Indians (NRIs) and overseas citizens of India (OCIs), an equivalent dollar had to be sourced from foreign investors.
This rule, embedded in Sebi's foreign portfolio investor (FPI) regulations, was designed to maintain a balanced investment pool but often proved a stumbling block. Consequently, if foreign investors reduced their contribution, AMCs were compelled to offload NRI investments to preserve the mandated 50:50 ratio.
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Gujarat International Finance Tec-City, or Gift City, treated as a foreign jurisdiction under the Foreign Exchange Management Act (FEMA), required its funds to operate with an FPI licence, thus subjecting them to these regulations. This placed Gift City funds on par with other offshore entities from Singapore, Mauritius, and the Cayman Islands, all struggling under the same restrictive regime.
However, in a notification on 26 June, Sebi revised its stance. The regulator announced a relaxation of the 50% foreign investment requirement for entities regulated by the International Financial Services Centres Authority (IFSCA) and based in Gift City. NRI/OCI investments can now go up to 100%.
While the cap on individual NRI contributions remains at 25%, the overall easing of restrictions is a game-changer.
“Foreign institutions look at fund size in addition to fundamental criteria like fund philosophy, investment process, performance etc," said Krishna Prassad, chief executive, Unifi Investment Management, an AMC. “The new regulatory change will enable commingling of funds from NRI/OCIs and foreign family offices, endowments, etc. in a flexible and unconstrained manner."
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“This helps the AMCs to go to market faster as we do not have to now wait for that “first investor", which had to be a foreign investor, which is not always that easy to get. This is certainly another step towards ease of doing business," said Jay Kothari, Global Head – International Business, DSP Asset Managers.
Competitive edge for Gift City funds
The removal of the cap not only simplifies the operational landscape for AMCs but also provides a competitive edge to Gift City-domiciled funds over their counterparts in other jurisdictions.
“This change only affects Gift City funds. So NRI participation in Gift City funds may increase," said Harshad Bhuta, a chartered accountant specializing in NRI clients.
From the perspective of overseas Indian investors, the benefits are equally compelling. “This is equally beneficial for NRIs as they can now participate in USD (US dollar)-denominated strategies even on day one which was a constraint to an extent. This also increases the options for NRIs, which is always welcome. NRIs have started preferring to invest in USD-denominated funds as it reduces the paperwork from their perspective," explained Kothari.
In conclusion, Sebi's regulatory relaxation is poised to unlock significant growth for Gift City funds, aligning them more closely with the needs of overseas Indian investors while removing operational hurdles for AMCs. This move promises to enhance the appeal and competitiveness of India-focused funds on the global stage, fostering a more dynamic and inclusive investment environment.
