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April 15, 2010 Embargo on Protected Cell Companies and Segregated Portfolio Companies Extended to Existing Entities
In our earlier Hotline dated April 10, 2010 “Formal Embargo on Protected Cell Companies and Segregated Portfolio Companies”, we had analyzed the implications of the instructions dated April 7, 2010 (“Instructions”) issued by the Securities and Exchange Board of India (“SEBI”) for filling the Foreign Institutional Investor (“FII”) and sub-account registration applications. Such instructions were applicable only to applications filed after April 7, 2010. The instructions made it mandatory for the applicants to make declarations that they are not set-up as a Protected Cell Company (“PCC”), Segregated Portfolio Company (“SPC”) or a Multi Class Vehicle (“MCV”). While an absolute exclusion was made on entities set-up as PCCs or SPCs, a carve-out was shaped for MCVs, subject to furnishing an undertaking along with the application form which inter alia includes that common portfolios shall be allocated across various share classes and the applicant shall be broad based or if portfolios are segregated for each distinct share class, then each such share class shall satisfy the broad based criteria. Further, issuance of any new class by a MCV would require a prior SEBI approval. In our analysis, we had pointed out possible concerns of fund managers who are managing collective investment vehicles registered with SEBI as FII or sub-account. The Instructions would create inability to offer separate class of shares of the collective investment vehicles, which would be custom made to suit the investment strategy of any specific investors. Also, as a fall out of the Instructions, fund managers would find it challenging to manage investments on a non-discretionary basis. These restrictions would also obligate the MCVs to fulfill the broad based test at each class level, which was earlier understood to be satisfied at the entity level. On a strict interpretation of the Instructions, it could have been said that the requirement of furnishing the declaration that the FII/ sub-account would maintain common portfolios across all the shares classes may have triggered only once the registration would have been due for renewal. With SEBI’s communication to Domestic Custodians, the problem seems to be approaching sooner than expected, as all existing FIIs and sub-accounts are required to furnish the declaration on their letter-head on or before September 30, 2010. Thus, existing sub-accounts which were structured as MCVs, in order to continue with their registration with the SEBI and for trading in listed Indian securities would be required to make drastic changes in terms of their existing fund management strategy and on or before September 30, 2010 would be required to adhere to the newly imposed conditions. Though SEBI has provided almost six months for the sun-set provisions, it would seriously jeopardize the structures of many existing FIIs and sub-accounts which were structured as MCVs or have a PCC/SPC in their group structure. Many collective investment vehicles are structured with a multitude of entities across the globe with specific feeders for distinct jurisdictions. Certain of such feeders could have been structured as PCC/SPC or MCVs. Taking a strict interpretation of SEBIs guidelines, such structures would henceforth be ineligible for FII/ sub-account registrations as somewhere in the group structure, there is a PCC/ SPC or MCV, though the ultimate holding of such PCC/ SPC/ MCV would only be a miniscule portion of the entire collective investment vehicle’s corpus. While we understand the regulators’ concerns about round tripping and money laundering by Indian residents, we believe that a blindfolded blanket ban on FIIs and genuine investors may not be the correct remedy. We believe that money laundering and round tripping for tax evasion issues should be rather checked by stronger and robust exchange controls. In the shadows of the global economic meltdown with a universal credit crunch several developed western markets are offering extremely good valuations and guaranteed returns, most of which have full capital account convertibility and easier entry and exit norms. In today’s global scenario apart from the developing economies, today India stand’s to compete with the developed western markets also for foreign inflow of capital. Therefore, it is imperative that the Indian regulators ensure that genuine foreign investments are not hindered due to an adverse regulatory regime, which may lead to diversion of India dedicated funds to other economies.
- Shikhar Kacker & Divaspati Singh
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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