Foreign funds want to complete mergers off market, Sebi says no

Mumbai: The Securities and Exchange Board of India (Sebi) has put the applications of at least six foreign funds seeking buyout approvals, which are part of their global plan, on hold, said two people privy to the development. These funds had asked the capital market regulator to allow the transfer of shares as part of the acquisition through off-market transactions because of the costs of doing these transaction through the stock exchanges. But, Sebi is insisting that these funds buy and sell the shares through the bourses to ensure transparency.

The reluctance of the regulator to allow such off-market transactions could impact global fund buyouts and mergers, including acquisition of Oppenheimer by US based Invesco and merger of OceanRock Investments with Canadabased Northwest & Ethical (NEI) Investments.

A leading European bank is in the process of acquiring fund house Janus Henderson. It will also impact the fund consolidation activity happening in Europe where FPIs such as Amundi and Columbia Threadneedle are undertaking cross-border mergers. All these funds have exposure to Indian stocks. Their total India holdings could not be ascertained but people in the know said they could be worth at least $2 billion.


Emails sent to Sebi, Invesco, Oppenheimer, OceanRock Investments, NEI, Amundi and Columbia Threadneedle remained unanswered.

Foreign funds are wary of transferring the shares through stock exchange platform since they would be subject to taxes including Securities Transactional Tax (STT) and capital gains tax, thereby increasing the cost of acquisitions.

These funds, which have significant exposure to several blue-chip stocks, have told the regulator that selling and buying shares on the exchange could trigger volatility in the markets.

Market regulator Sebi has been opposed to off-market transactions, which has been traditionally misused by market participants to structure opaque deals and avoid tax outgo.

“The regulator has expressed its discomfort over such waivers since the entities would not be paying any tax even as they are undergoing a change in control,” said one of the sources cited above. “Intelligence agencies are also wary about transactions that happen off the regulatory radar, both in listed and unlisted space.”


Sebi says no to foreign funds

Foreign funds are pushing Sebi to grant them the same benefits that companies get for share transfers. For instance, if a company acquires another company, transfer of the shares from one company to another can be done off-market. Inter se transfer of shares — done within promoter groups — are also allowed to conduct off-market deals. However, there is no specific exemption if the transaction involves two trusts. All major FPIs are structured in form of trusts. The mergers and acquisitions of global funds in progress have already received regulatory approval in their home jurisdictions and all these funds are based out of either the US or Europe In addition to Sebi, the central government too has been wary of such off-market transaction as promoters of several investors have used the route for tax avoidance and money laundering purposes. In the Union Budget FY18, the government withdrew all the tax benefits for off-market transactions including the benefit of LTCG tax. During that time, LTCG on listed entities was nil if the investor had paid STT. In the Union Budget FY19, the government reintroduced LTCG for listed entities. However, it is more expensive to do an off-market transaction since they attract 20 per cent LTCG tax compared to 10 per cent if the transaction is done on exchange platform and STT is paid for.