Hedge funds threaten to withdraw India investments amid regulatory crackdown

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Adani, one of India's largest companies, was attacked by short sellers last year and hedge funds threatened to pull out of investments in the country amid controversial new rules.

Rules set by India's markets regulator Sebi will require large foreign investors betting on Indian stocks, including hedge funds, to disclose all their end-investors, which the funds believe will cause “serious practical difficulties” to the funds and mark a A clear departure from international practice.

Large multinational banks are also concerned that they will be affected by earlier versions of the rules. Banks including JP Morgan, Goldman Sachs, BNP Paribas, Societe Generale and UBS wrote to Sebi in January this year, warning that providing investor information to regulators was “very difficult” and had “significant legal and regulatory reasons”. The bank declined to comment.

However, their concerns were partially alleviated after regulators clarified exemptions for many funds that do business with banks, reducing the likelihood that bank clients would be subject to the rules.

People at two banks who wrote to Sebi in January told the Financial Times that they had dropped their objections since speaking to the regulator. Sebi last month also proposed exempting university funds and endowments from disclosure requirements.

But hedge funds remain concerned about the impact of new rules that will require foreign investors with more than $3 billion in assets in the Indian market to disclose “specific details” of the end investors who benefited from the investment.

This includes any hedge fund using prime brokerage services at a bank that itself crossed the $3 billion threshold. It also covers investors who allocate 50% of their Indian portfolio to any one company.

“These changes have given [foreign investors] Looking to invest legally in India,” London-based hedge fund trade body AIMA wrote to Sebi this week.

The rules are part of Sebi's efforts to better understand the end investors buying Indian stocks.

India's stock market regulator is under pressure to take action against investors in opaque foreign portfolios after Adani Group released an explosive short-selling report last year that wiped out the value of the group's listed companies and the net worth of its founder Gautam billions of dollars. Adani.

Sebi's efforts to unmask the identities of foreign investors are also driven in part by the government's broader efforts to closely track the flow of money into India from neighboring countries, including China.

In 2020, India introduced regulations to make it more difficult for China and Chinese-backed companies to invest, requiring foreign investors from countries with a land border with India to obtain government permission before entering India.

Chinese companies including electric car maker BYD and Apple supplier Luxshare Precision Industry have violated regulations with their expansion plans in India.