Sebi seeks more disclosures from ‘high-risk’ FPIs

Consultation paper proposes granular data of ownership

Sebi seeks more disclosures from ‘high-risk’ FPIs

The Securities and Exchange Board of India (Sebi) on Wednesday proposed to tighten the guidelines for foreign funds with a substantial stake in Indian companies. The decision comes on the back of criticism regarding the lack of oversight over the ultimate beneficial owners in foreign portfolio investments (FPI) in the Adani Group.

In a consultation paper, the regulator has proposed mandating additional disclosure from high-risk FPIs with assets of over Rs 25,000 crore to prevent circumventing norms with respect to minimum public shareholding.

Sebi has defined high-risk FPIs as those holding more than 50% of their equity assets under management (AUM) in a single corporate group. It has estimated that around 6% or Rs 2.6 trillion of the FPI investment falls in the high-risk category. The rules also aims to keep a check on hostile acquisitions of Indian entities.

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The additional disclosure would include granular data of all entities with any ownership, economic interest, or control rights on a full look-through basis, up to the level of all natural persons and/or Public Retail Funds or large public-listed entities, says the regulator.

“At the time of registration, high-risk FPIs shall be asked to submit an undertaking confirming they have suitable mechanisms in place with their investors (on a full look-through basis), which shall include waiving off their privacy rights in their respective home jurisdictions in favour of Sebi, to allow for the submission of additional granular disclosures to Sebi/DDP (dedicated depository participants) if any of the concentration or size threshold conditions were to be crossed,” says the paper.

It adds that existing high-risk FPIs shall submit such undertaking within six months of the issuance of the guidelines.

Shankar Sharma, founder, Gquant, said, “Sebi is trying to plug the issues highlighted in a recent case. How far this can be implemented remains to be seen.”

The regulator has also raised concerns about these FPIs concentrating their holdings in a single company/group for extended periods, which raises suspicion of the group’s promoters or investors using the FPI route to circumvent regulatory norms like Minimum Public Shareholding (MPS). If so, the apparent free float in a listed company may be misleading and prone to price manipulation, the paper states.

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Further, Indian regulations allow entities or beneficial owners (BOs) based in countries that share a border with India only to invest via the government route. While these do not apply to FPIs, there is a risk of the route being misused to circumvent such norms.

It has categorised “prima facie high-risk FPI schemes with significant holdings, where their India-oriented AUM is relatively small vis-à-vis their global AUM” as moderate-risk and, therefore, exempt from the proposed disclosures. These include large global index funds and ETFs tracking global indices of which India is a part.

Sebi seeks to mandate existing high-risk FPIs to either comply with additional granular disclosure requirements within six months or bring down their AUM below the said threshold within the same timeframe.

For those that cross `25,000 crore in AUM in the future, the timeline for the same would be three months. Any material change would need to be communicated to their DDPs within seven working days.

Existing FPIs in the process of winding down their portfolios and new FPIs that have just begun taking exposure will be granted a leeway of six months to cross the threshold.

Sebi said the proposed additional disclosure requirements will not impact low-risk and moderate-risk FPIs in any manner. The regulator has invited comments on the proposals, granting time till June 20.