Investment hubs such as the Cayman Islands, Singapore, Ireland, and Luxembourg may come under greater scrutiny of the Securities and Exchange Board of India (Sebi) because a significant portion of investments coming from China and Hong Kong into India may be routed through these jurisdictions, said people in the know.
The regulator last week reached out to custodians for beneficial ownership information of investors coming from China, Hong Kong, and 11 other countries.
Over the years, several Chinese funds that manage $1 billion or more have set up operations in Hong Kong, which serves as a launchpad for mainland managers seeking access to overseas markets. The bulk of the investments from Hong Kong, in turn, are routed through the Cayman Islands, which have historically been an attractive jurisdiction for Asia-focused funds.
Companies from the Cayman Islands have also been listing on the Hong Kong Stock Exchange (HKSE) since the mid-1990s, according to reports. By some estimates, these companies accounted for nearly 50 per cent of all listed ones on the HKSE’s main board at the end of 2017.
“More than 90 per cent of the funds from Hong Kong don’t come to India directly. They set up structures in Cayman and then invest in other markets, including India,” said a person familiar with the matter.
This is how it works. Funds set up in Hong Kong typically raise money from Hong Kong or Chinese nationals. The majority of the investments in many such funds are from Chinese investors, making them the ultimate beneficial owners (UBOs), said experts. Each of the HK funds then feeds the money into another vehicle in the Cayman Islands, and that acts as a master fund and invests in other markets.
Singapore is another jurisdiction that could have strong China links, given that ethnic Chinese make up an estimated three-fourths of its citizen population.
“While most of the promoters and fund managers of funds registered in the country are Singapore citizens, they may have Chinese roots. This could make it harder to determine if the beneficiaries of these funds are actually Chinese,” said the person quoted above.
Ireland and Luxembourg, by way of being popular offshore fund jurisdictions, also attract sizeable Chinese money, said market watchers. At present, there are 16 foreign portfolio investors (FPIs) from China registered in India. Of those 15 hold Category-I licence. In comparison, there are 323 FPIs from the Cayman Islands, 428 from Singapore, 611 from Ireland, and 1,155 from Luxembourg. Singapore, Ireland, and Luxembourg feature among the top 10 FPIs that invest in India.
These jurisdictions (except China) have a well-established fund industry ecosystem with intermediaries such as fund administrators, accountants, and lawyers, and are used by most funds to route their investments globally, and not just India.
Another person who deals with FPIs said it was much harder for the Chinese to invest in India until a few years ago. This is because until 2014, all licences granted to FPIs were reviewed by Sebi. After the amendment of FPI regulations in 2014, however, the process of receipt and review, including the generation of the registration certificate, shifted from the regulator to the designated depository participants, leading to differences in levels of scrutiny. Last week, Sebi sent an email to all DDPs, saying all fresh FPI applications coming from bordering countries be referred to the regulator for approval. It shot off another email later, keeping the diktat under abeyance.
According to current norms, holding by an FPI or an investor group should not exceed 10 per cent of the paid-up capital of the listed entity. It is not yet clear if Sebi will lower this ceiling for funds that have Chinese beneficial owners. “While new FDI investments would be restricted due to the recent Press Note 3, an FPI licence is valid for three years and allows a fund to freely invest additional money up to 10 per cent of the Indian company’s capital. Special rules would be needed if FPI investments in certain sectors or from certain countries are to be controlled,” said Rajesh Gandhi, partner, Deloitte India. Viraj Kulkarni, founder and CEO, Pivot Management Consulting, said: “There is nothing wrong with the steps taken by the regulator and the government. India cannot afford to have FPIs which enter and exit its markets, driven by factors other than market conditions.”
He said instead of focusing on Chinese FPI flows, the Indian government should redouble its efforts to woo investments through countries such as Mauritius, the US, the UK, Japan, South Korea, Cyprus, Singapore (with proper UBOs), France, and Germany, which have over decades been steadfast in their inflows into India and have been the big inflow centres.