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Hedge funds are threatening to pull investments from India because of controversial new rules introduced in response to last year’s short seller attack on Adani, one of the country’s biggest companies.
The rules, from Indian markets regulator Sebi, require big foreign investors — including hedge funds — betting on Indian stocks to reveal all their end investors, something the funds argue would create “severe practical difficulties” for funds and mark a stark departure from international practice.
Large global banks also feared they would be caught by an earlier version of the rules. Banks including JPMorgan, Goldman Sachs, BNP Paribas, Société Générale and UBS wrote to Sebi in January warning there were “material legal and regulatory reasons” why it would be “very difficult” to supply investors’ information to the regulator. The banks declined to comment.
Their concerns have been partially allayed, however, after the regulator clarified carve outs for many of the funds the banks do business with, making it less likely the banks’ clients will be caught by the rules.
People at two of the banks that wrote to Sebi in January told the Financial Times they had dropped their opposition since speaking to the regulator. Sebi last month also proposed exempting university funds and endowments from disclosure requirements.
But hedge funds remain worried about the effect of the new rules, which will require foreign investors with more than $3bn of assets in the Indian market to disclose the “granular details” of end investors benefiting from the investment.
This includes any hedge funds using prime broking services at a bank which has itself breached the $3bn threshold. It also covers investors that have allocated 50 per cent of their Indian portfolio to any one company.
“The changes create severe practical difficulties for [foreign investors] wishing to make legitimate investments in India,” hedge fund trade body London-headquartered AIMA wrote to Sebi this week.
The rules are part of a drive by Sebi to better understand the ultimate investors buying Indian stocks.
India’s stock market regulator came under pressure to act on opaque foreign portfolio investors after the release of an explosive short seller report on the Adani Group last year that wiped billions of dollars off the value of the group’s listed companies and the net worth of its founder Gautam Adani.
Sebi’s efforts to unmask foreign investors are also partly driven by a wider government effort to closely track money coming into India from neighbouring countries, including China.
In 2020, India introduced rules that made it harder for Chinese and Chinese-backed companies to invest, requiring foreign investors from countries with which India shares a land border must secure government permission before entering India.
Electric vehicle maker BYD and Apple supplier Luxshare are among the Chinese companies whose expansion plans for India have butted up against the regulations.
