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Welcome moves: SEBI did well to ease conditions for FPIs, but existing regulations must be tweaked judiciously

The Securities and Exchanges Board of India has made a valiant attempt to address various issues that had been vying for its attention over the past few months. The changes made to the existing rules for foreign portfolio investors could help ease the registration and operational rules governing these investors, but it is doubtful if it will help stem the current outflow of foreign money from domestic equity markets. Also, some of the changes could revive the spectre of money laundering. The Centre might have been worried about the protracted outflow of foreign investor money from equity markets, amounting to over $3 billion over the past two months. The latest easing of rules could be an olive branch to foreign investors. But these changes might not be sufficient to change the sentiment of foreign investors towards Indian equity. The Nifty is one of the worst performing indices so far this year. Also, eight out of every ten stocks traded on the NSE are loss-making so far this year. These could be having a greater influence on FPI investments towards Indian stocks.

The regulator is, however, right in accepting some of the recommendations of the working group constituted for reviewing the Foreign Portfolio Investors Regulations, 2014. Simplifying and consolidating the existing rules and deleting some of the unnecessary documentation requirements are moves in the right direction. While easing the rules might help FPIs, the regulator needs to be careful about not being too lenient in this space. Many of the rules are in existence to check money laundering and round-tripping through the FPI route. Diluting these could lead to increased misuse. For instance, doing away with the rules for broad-based eligibility criteria, removing Category-III FPIs and allowing offshore funds floated by Indian mutual funds to invest in India after obtaining registration as FPIs, might turn problematic in future. Similarly, the regulator should not relax the existing regulations on participatory notes that have been successful in curbing flow of hot-money. The move to enable credit rating agencies to obtain details regarding existing and future borrowing of the issuer from the lender or any other organisation is welcome. But SEBI needs to do more to streamline their functioning.

The Board has cleared the air over migration of companies from the Innovators Growth Platform to the trading on regular platforms and the rules overseeing share buybacks have been streamlined. Enabling other entities such as urban development authorities, city planning agencies and pooled finance development funds to raise funds from the public through bonds will help raise funds to improve public utilities and infrastructure. The move to set up an office of informant protection that will devise the policy relating to receiving and registration of voluntary information relating to insider trading is also a good move, since informant incentives and protection are important to prevent wrongdoings in companies.

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