The Reserve Bank of India (RBI) has expressed concerns over the market regulator’s proposal to merge investment route of non-resident Indians (NRIs) with foreign portfolio investor (FPI) route, said three people privy to the development. The central bank is against the plan in its current form because the regulations that govern both the modes of inflows are separate, and clubbing the two would cause a regulatory haze.

RBI is concerned over what rules would apply to the non-market investments made by NRIs through the non-resident external Rupee (NRE) route if they were merged with the foreign portfolio route. Further, different investment limits apply to NRIs and FPIs. Monitoring of investment limits also becomes a challenge. While flows from off-shore investors come under Sebi’s ambit, investments by NRIs are regulated by RBI.

The issue was raised by central bank officials in a meeting of the HR Khan Committee — appointed by the Securities and Exchange Board of India (Sebi) – held late January. An email sent to RBI remained unanswered.

Sebi had approved proposals of the HR Khan Committee including the merger of NRI and FPI route after the regulator’s circular on April 10 that introduced additional curbs on domestic investments by NRIs sparked panic among offshore funds.

While FPIs can buy or sell shares in the Indian markets through their custodians, mainly foreign banks, NRIs can make the investments only through their designated banks. These investments are regulated by RBI’s portfolio investment scheme (PIS). The NRE accounts are also used for other investment purposes including real estate purchases and fixed deposits.

“There are several practical challenges with the implementation of the FPI-NRI merger and more than two lakh NRIs who hold both fixed deposits and market investments will be impacted,” said a source privy to the consultations. “In the meeting, RBI officials had raised concerns on the issue and asked the HR Khan Committee to dwell upon how the problems can be resolved before taking the issue forward.”

The panel will meet RBI officials once again in second week of February to take a final call, the source said Investment limits work differently for FPIs and NRIs. As per RBI rules, an FPI can hold up to the sectoral cap applicable in a company. In several sectors, 100 per cent FPI investment is allowed; while in sectors such as banking, off-shore funds can own up to 74 per cent. NRIs together cannot own more than 24 per cent in a listed company. If both the schemes are merged, it is unclear as to what limits would have to be considered.

If both the routes are merged, the designated banks will have to register with Sebi. Various market participants too are opposed to the proposed merger of NRI and FPI routes.

“This is impractical as the merger is going to be full of complexities,” said another source cited above. “For example, NRIs need not seek licences to invest but they just open an account with domestic brokers. FPI route mandates licence only for three years with a cost.”

Until 2018, there were no explicit rules imposing restrictions on NRIs investing through FPI route. The only condition that was to be met was an NRI or a group of NRIs could not be in control of the fund. If the HR Khan Committee plan to merge the two schemes do not go through, it could impact NRI flows into Indian listed companies, said some market participants.

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