FPI flows may trip on Sebi’s stricter disclosure rules

Such investors could reduce their exposure to evade ‘high-risk’ tag and shift to friendlier jurisdictions, say experts

The Securities and Exchange Board of India’s (Sebi’s) latest proposal on identifying ultimate beneficial ownership of offshore funds could impact portfolio flows and force foreign portfolio investors (FPIS) to redraw their India strategy, experts say.

The markets regulator on Wednesday proposed to categorise FPIS with a composite exposure of more than ~25,000 crore and a singlegroup exposure of more than

50 per cent of their assets as ‘high risk’. Such FPIS will be required to provide additional granular disclosures such as full identification of their ownership, economic interests, and control rights down to the level of natural persons or public retail funds or large listed companies.

After the enforcement of new disclosure norms, experts say, some FPIS may review their arrangement for investing in the Indian market, fearing being tagged ‘high risk’.

“Investors will feel jittery about the information being disclosed about their structures, especially where different jurisdictions are used to deploy funds. FPIS that could fall within the realm of ‘high-risk FPIS’ would surely have a relook at their investors and flow of monies, to either be able to disclose or wind up or cease to be a high-risk FPI,” said Manendra Singh, partner, Economic Laws Practice.

Further, Sebi has proposed that its new rules would be unconstrained by the secrecy laws of other jurisdictions.

The proposal comes against the backdrop of the Adani-hindenburg saga where the regulator hit a dead-end when it came to identifying the end beneficiaries at certain FPIS.

Legal players say overriding secrecy laws would be challenging to implement but the responsibility of the disclosure will fall on the designated depository participants (DDPS), who facilitate FPI registration and investments.

“Though this move would make the process more tedious and might discourage certain foreign investors to invest in India through the FPI route, it would enable better transparency and also prevent misuse of this route. That being said, there may be legal and contractual challenges in overseas jurisdiction for determining ultimate beneficial ownership,” said Moin Ladha, partner — corporate and commercial, regulatory practice, Khaitan & Co.

Experts also believe that FPIS could restructure their holdings to evade the ‘high-risk’ tag. This could entail liquidating their India holdings and shifting them to friendlier jurisdictions or make use of structures like participatory notes.

“There have been instances where FPIS have eyed a particular company or a group for long-term exposure. Thus, we may see some structuring of FPI investments into India, pursuant to these recommendations. Sebi may still question FPIS even after structuring their investment to bring it within the concentration limit, if Sebi thinks that the FPIS are deliberately trying to keep their investment into respective Indian company or a group close to the concentration limit,” said Dhaval Jariwala, partner, PNDJ & Associates.

Sebi estimates ~2.6 trillion, or 6 per cent, of FPI AUC (assets under custody) is at the risk of being identified as ‘high risk’. Industry players say Sebi’s proposal will be finalised after the market feedback, and FPIS will take a wait-and-watch approach. The regulator has said it will provide a six-month time period for FPIS to comply following which their licences could get revoked.

One of the challenges cited by experts is the applicability of the Sebi’s proposed amendments on FPI domiciled in certain countries, which allow omnibus structures.

“One could question the extra-territorial applicability of Indian laws in such cases. However, if investors themselves provide exemption or there are bilateral informationsharing treaties between India and such jurisdictions, it could lead to disclosures of certain additional information,” said Singh.