Select overseas investors may get to invest in local stock markets by registering with foreign institutional investors (FIIs). The aim is to ensure a minimum issuance of participatory notes (PNs) in the Indian markets, an official privy to the development said.

“Let more foreign portfolio investors come in. But we want investors operating under various umbrellas to come in through the front door and not through subterfuge,” said a senior official. As against PNs, ‘sub-accounts’ have to be registered with Sebi by non-residents on whose behalf investments are made in India by an FII registered with Sebi.

The existing norms of a broad based fund (which stipulates at least 20 investors with no investor holding more than 10%) are expected to continue even if changes are carried out. The government has received representations to make NRI investments easier as the current route is not tax efficient vis-à-vis foreign investment coming into India via setting up FII sub account vehicle in a tax efficient jurisdiction.

According to Punit Shah, partner, RSM & Co, "Permitting NRIs to invest through FII/sub-account route would be more tax efficient for the NRIs and will certainly enhance substantially the inflow of investments in India. Sebi should take a pragmatic view in the matter." Investment by NRIs has become more difficult after overseas corporate bodies or OCBs were banned after the last stock market scam.

However, letting 20 or more NRIs set up a sub-account on a discretionary basis — where the money will be managed by the FII and not the NRIs — has to be allowed, keeping in mind the present regulation that NRIs cannot hold more than 24% in a local company. Till now one of the reasons for not encouraging NRI sub-accounts was to ensure that this investment cap is not breached.
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