GIFT CITY/ foreign portfolio investor (FPI):

Why in News? The Securities and Exchange Board of India (Sebi) recently allowed non-resident Indians (NRIs) to own up to 100 per cent in global funds at the GIFT City and gave passive funds more exposure to group companies. Currently, NRIs and Overseas Citizens of India (OCIs) cannot own more than 50 per cent in a foreign portfolio investor (FPI).

• The move could pave the way for greater flows from the Indian diaspora into the domestic stocks.
• “A 100 per cent contribution limit shall be available subject to the FPI submitting copies of Permanent Account Number (PAN) cards of all their NRI/OCI individual constituents, along with their economic interest in the FPI,” the markets regulator said.
• Market experts believe a more liberalised regime for NRI/OCIs could lead to twin benefits — boost the fund ecosystem at the GIFT City as well as attract genuine flows from overseas Indians.

At present, the combined holdings of NRIs and OCIs in a global fund must be less than 50 per cent, while that of a single NRI or OCI is capped at 50 per cent.

“The conditions set forth for this increased participation are meticulously designed to balance the need for flexibility with the imperative of managing regulatory risk,” said Suresh Swamy, partner at Price Waterhouse & Co. Moreover, such FPIs will still have to adhere to the granular disclosure norms on economic interest and ultimate ownership issued by the regulator in August last year.

KEY DECISIONS :

NRIs, OCIs coming via GIFT City to greater exposure to domestic equities >

IMPLICATION:

At present, the combined holdings of NRIs, OCIs in a global fund has to be less than 50 per cent. The move will allow NRIs, OCIs to own up to 100% in a global fund domiciled at IFSCs.

Passive funds allowed 35% exposure to group companies of sponsor:

IMPLICATION: Currently, an MF is not allowed to invest over 25% of corpus in group firms of the sponsor. This can lead to tracking error for ETFs. More investment legroom will allow passive funds, ETFs mimic the index performance better.

About Foreign Portfolio Investors (FPIs):

They are entities, typically institutional investors, that invest in financial assets such as stocks, bonds, and other securities in a country other than where they reside. FPIs include foreign institutional investors (FIIs), qualified foreign investors (QFIs), and foreign venture capital investors (FVCIs).

FPIs:

1. Investment Approach: FPIs invest in financial assets with the objective of earning returns. They usually have a diversified portfolio across various asset classes and sectors.
2. Regulation: FPIs are regulated by the regulatory bodies of the country in which they invest. Regulations typically govern the maximum amount of investment allowed in various sectors, disclosure requirements, and investment restrictions.
3. Impact on Financial Markets: FPIs play a significant role in the financial markets of the countries in which they invest. Their buying and selling activities can influence asset prices, market liquidity, and overall market sentiment.
4. Economic Impact: FPI flows can have both positive and negative effects on the economy. While FPI inflows can provide capital to fund investment and stimulate economic growth, sudden outflows can lead to currency depreciation and financial instability.
5. Taxation: Taxation of FPIs varies depending on the country and the type of investment. Some countries offer tax incentives to attract FPIs, while others impose taxes on capital gains, dividends, or interest income earned by FPIs.
6. Risks: FPI investments are subject to various risks, including market risk, currency risk, political risk, and regulatory risk. FPIs often conduct thorough research and analysis before making investment decisions to mitigate these risks.

What is GIFT City?

• It stands for Gujarat International Finance Tec-City. It’s India’s first operational smart city and international financial services center (IFSC), located in the state of Gujarat.
• The city was designed to promote financial services and other related industries on a global scale.
• It aims to provide world-class infrastructure, services, and regulatory environment to businesses operating in finance, banking, insurance, and capital markets. GIFT City is envisioned as a hub for international finance, similar to global financial centers like Dubai, London, and Singapore.