FCNR(B) is now Plan A for Gulf NRIs, leaving India-focused funds behind - The Economic Times

Dubai: India-focused fund managers looking to raise billions of dollars from Gulf-based NRIs are facing stiff competition from the Reserve Bank of India's foreign currency non-resident (bank) deposit window, with investors increasingly preferring guaranteed returns under the scheme over private and public market investments.Industry executives estimate that between 60%-80% of capital that would typically have flowed into India-focused funds and other alternative investments products from Gulf-based NRIs is instead being channelled into FCNR (B) deposits offering attractive dollar returns.Also Read: Will FCNR (B) deposit scheme that's bringing billions of dollars to India end? RBI Governor says thisThat has prompted some fund managers to recalibrate fundraising strategies, including scaling back offshore fundraising targets, focusing more on domestic investors, and postposing aggressive marketing in the Gulf until the deposit window closes on September 30.ET Online

India-focused fund managers scale down marketing in Gulf until RBI’s special swap window closes on Sep 30"The FCNR (B) scheme has crowded out investments to an extent. For credit funds, especially those targeting NRI investors, anywhere between 75% and 100% of intended allocations have gone into FCNR(B) deposits," said Amit Goenka, chairman and managing director of Nisus Finance, which is currently raising a $500-million private credit vehicle.Nisus Finance, which also operates a Dubai-based property fund, was looking to raise $300 million offshore, mostly from the UAE."The offshore component of our fund was expected to attract significant NRI participation based on our experience, but the NRI demand in the region has been around 60-70% lower than what we had originally expected," Goenka said.Prateek Pant, market head, Middle East and Africa, at ASK Private Wealth, said several of its clients have redeemed existing investments in order to participate in FCNR(B) deposits even as "almost all incremental allocations" are going into the scheme.Also Read: Banks mobilise $27.99 billion via FCNR deposits since RBI introduced USD-rupee forex swap facility"If we were previously expecting a certain level of inflows across multiple investment strategies, we're now seeing only about 25-30% of those flows materialise, while roughly 70% is being directed towards FCNR(B) deposits," he said.Pant said he is advising several managers to visit Dubai after September 30. "First, it's the summer holiday period and many clients are away. Second, it's difficult to recommend a private credit fund targeting 10-12% returns when investors can earn around 15% through a leveraged FCNR(B) deposit," he said.Ashish Marwah, chief investment officer at Neovision Wealth Management, said the RBI window offers Gulf NRIs and family offices tax-free dollar yields, sweetened through leverage. "Taking equity risk just sits on the sidelines for a while. GCC family offices are making a completely rational treasury play right now," he said.Neovision is now actively setting up fourth quarter entry points with regional investors, Marwah said. "This crowding out effect is strictly deadline-driven. We expect capital flows to rebalance after the September 30 deadline," he said.The Abu Dhabi-headquartered firm had launched two India-focused public feeder funds in partnership with ICICI Prudential Asset Management Company in June.Another India-focused fund manager with UAE operations said investors are splitting allocations between funds and FCNR (B) deposits, with the lion's share going to the latter. "An investor who might otherwise have allocated $6-7 million to our fund instead invested about $5 million in FCNR(B) deposits and only around $1 million in the fund," he said, requesting anonymity.Another UAE-based fund manager said fundraising targets from the Gulf region may have been scaled back.Goenka of Nisus Finance said many investors find the FCNR(B) route more comfortable on a risk-adjusted basis as private credit funds also normally target post-tax returns in the 15-16% range over a five-year horizon.Those still opting for private credit funds are doing so because it generates periodic income distributions, whereas FCNR(B) deposits are essentially compounding products, he said.Pant of ASK said while fund managers are focusing more on raising capital in the domestic Indian market. While it is a temporary phase, it will have an impact on liquidity, he said. "We'll have a much clearer picture once the current mobilisation window closes and we see how investor behaviour evolves during the October-December quarter," Pant said.