Hedge funds have threatened to withdraw their investments from India due to controversial new rules that were introduced as a response to the short seller attack last year on Adani, which is one of India’s largest companies.
According to the rules of Indian regulator Sebi for Indian stock markets, big foreign investors, including hedge funds, are required to disclose all their end investors. The funds claim that this would cause “severe difficulties” and be a departure from international practices.
The large global banks were also concerned that they might be caught up in an earlier version. JPMorgan and Goldman Sachs as well as BNP Paribas and Societe Generale wrote to Sebi to warn that there are “material legal reasons and regulatory reasons” for why it will be “very hard” to provide information about investors to the regulator. The banks declined comment.
The regulator has clarified the carve-outs for the many funds that banks deal with. This makes it less likely that the bank’s clients will be caught up by the rules.
Those at two banks who wrote to Sebi back in January said they have changed their minds since talking to the regulator. Sebi also proposed last month to exempt university funds and endowments of disclosure requirements.
Hedge funds are still concerned about the impact of the new rules that will require foreign investors who have more than $3bn in assets on the Indian market to reveal “granular detail” about end investors.
It includes hedge funds that use prime broking at a bank, which itself has exceeded the threshold of $3bn. This includes investors who have invested 50% of their Indian portfolio in a single company.
The London-based hedge fund trade group AIMA sent a letter to Sebi last week stating that the changes “create severe practical difficulties” for [foreign] investors who wish to make legitimate investment in India.
Sebi is trying to understand who are the ultimate investors that buy Indian stocks.
India’s stock exchange regulator was under pressure to take action against opaque foreign portfolio investors following the release of a short seller report last year on the Adani Group, which wiped out billions of dollars from the value of listed companies in the group and the networth of its founder Gautam Adani.
Sebi’s efforts to reveal foreign investors is also driven in part by an effort on the part of the government to track closely money that comes into India from other countries including China.
India will introduce new rules in 2020 that make it more difficult for Chinese companies and Chinese-backed firms to invest. Foreign investors from countries where India shares a border with India must obtain government permission prior to entering India.
BYD, a Chinese electric vehicle manufacturer, and Apple supplier Luxshare were among the Chinese firms whose plans to expand in India ran afoul of the Indian regulations.