Sebi may give FPIs bourse membership

Mumbai: The Securities and Exchange Board of India (Sebi) is considering allowing foreign portfolio investors (FPIs) who trade in the Indian markets through brokers to become members of stock exchanges in what could potentially be a big blow to local brokerages. The capital markets regulator is also considering asking companies to seek minority shareholder approval to grant special rights to private equity (PE) investors, a move that is unlikely to be popular with the latter.

The Sebi board will consider these proposals in its 23 September meeting, two people with direct knowledge of the matter said on condition of anonymity.

A Sebi spokesperson did not respond to an email seeking comment sent Friday.

For starters, Sebi is considering allowing so-called category 1 and 2 FPIs to become members of exchanges for debt market trading. Gradually, they will be also be able to execute equity trades, said one of the two people cited above.

Category 1 FPIs include central banks and sovereign wealth funds. Category 2 includes mutual funds and banks.

The move will likely be cheered by FPIs, but only if it doesn’t mean more compliance.

“Some sort of limited broking licence will help in speedy execution of trades and address confidentiality concerns,” said Tejesh Chitlangi, partner at law firm IC Legal.

Currently, FPIs trade through brokers, who derive a significant portion of their broking revenues from institutional investors. High competition and the stress of reducing broking fees has already made many of them diversify into ancillary activities such as investment banking and asset management.

“Brokerages will face pressure if the move is allowed. There is no precedence for the move the world over,” said the head of a domestic brokerage on condition of anonymity.

To be sure, FPIs can also access the market directly through a mechanism called direct market access, but this remains a non-starter on account of onerous documentation and compliance requirements.

Indeed, registered FPIs say Sebi’s proposal makes sense only if compliance requirements are diluted further, as reduced costs alone may not be enough incentive for them to want to trade directly on exchanges.

“There could be other ramifications such as increased level of compliances. FPI interest is in managing money, not saving on trading cost,” said U.R. Bhat, managing director at Dalton Capital Advisors (India) Pvt. Ltd.