The capital markets regulator will consider a proposal to allow an individual foreign investor to hold as much as 15% in a local stock exchange in its 12 March board meeting, according to two people familiar with the agenda.
Existing rules bar a foreign investor from owning more than 5% now.
The Securities and Exchange Board of India (Sebi) meeting will also discuss reforms suggested for the alternative investment funds industry and ways to strengthen rules governing the commodity markets, they said.
In addition, as is customary, the board will also discuss any budget announcements pertaining to the capital markets, said the first person cited above on the condition of anonymity as he is not authorized to speak to the media.
“The Sebi board will meet on 12 March and will issue a consultation paper based on the Narayana Murthy panel report, which had suggested a slew of reforms for the alternative funds industry,” said the second person cited above.
“Additionally, the proposal to allow a single foreign investor to hold up to 15% in a stock exchange will also be considered,” the person added.
An email sent to Sebi on Thursday did not elicit a response.
Sebi had set up an advisory panel headed by Infosys founder N.R. Narayana Murthy to suggest changes in existing rules to facilitate capital-raising by alternative investment funds (AIFs) and boost entrepreneurship.
The panel, in a report submitted in January, had suggested that Sebi change its eligibility norms for investors to put money in AIFs.
The current norms require a person to invest at least Rs.1 crore in an AIF. The rules also say that any individual with a total annual income of at least Rs.50 lakh should be allowed to put money in AIFs.
According to market experts who deal with AIFs, Sebi may consider easing some of these restrictions.
“Sebi would not be in a position to implement the tax suggestions that are part of the panel report on its own. Certain suggestions pertaining to sub-categorization of Category III AIFs and clarifications on investible limits could be implemented by Sebi,” said Tejesh Chitlangi, Partner, IC Legal.
AIFs collect funds from high-net-worth investors to invest primarily in unlisted securities and start-ups to promote entrepreneurship.
AIF managers raised capital commitments worth Rs.20,457.45 crore from affluent Indian investors till the end of December, compared to Rs.11,186.36 crore in the previous year.
The more contentious issue up for discussion is an increase in the foreign shareholding in stock exchanges.
As per the current Stock Exchange and Clearing Corporation (SECC) regulations, an individual foreign investor can hold up to 5% in a stock exchange.
On 5 December 2015, The Economic Times reported that the finance ministry had asked Sebi for its opinion on allowing an individual foreign investor to hold up to 15% in exchanges. In a subsequent report on 31 December, the newspaper reported that Sebi was of the view that there are no regulatory issues in allowing this increase in shareholding.
However, in January, the National Stock Exchange (NSE) wrote to the finance ministry, saying that the control of stock exchanges should rest with domestic investors.
Singapore Exchange Ltd and Deutsche Bourse AG hold 4.9% each in BSE Ltd. In NSE, the top foreign shareholders include Gagil FDI Ltd (Cyprus), GS Strategic Investments Ltd, SAIF II SE Investments Mauritius Ltd and Aranda Investments (Mauritius) Pte Ltd. They hold 5% each.
A third person familiar with Sebi’s thinking said that the recommendations of its commodities derivatives advisory committee (CDAC) may also be put up in front of the Sebi board.
Following a merger with the Forward Markets Commission (FMC), Sebi is now the regulator for the commodity derivatives market.
In a board meeting in August, Sebi had issued circulars to facilitate the seamless merger of commodity participants with the securities market. However, no fresh norms or regulations were announced.
“The Sebi board is likely to focus on having an effective price polling mechanism and regulations for warehouse service providers,” said the third person cited above.
“The current price polling mechanism relies on participants that have been empaneled by the exchanges. This doesn’t entice trust in the market as there could be an element of conflict of interest involved in arriving at the right price. If the regulator comes up with a methodology, then the prices would have more sanctity,” said Chirag Shah, vice-chairman, Commodity Participants Association of India-western region.
Spot agri commodities markets in India are unorganized, with traders quoting different prices.
Commodity exchanges arrive at a standard price almost similar to the prevailing market price by speaking to large and reliable traders in various mandis across the country. This process is termed as polling.