Sebi for tightening FPI disclosure regulations
The Securities and Exchange Board of India (Sebi) has proposed that foreign portfolio investors (FPIs) with investments concentrated in a single stock or stocks of a business group should provide granular information on beneficial ownership to custodians.
India’s markets regulator proposed tightening of disclosure requirements for offshore funds in a consultation paper released on Wednesday. The move is intended to prevent promoters of Indian companies from abusing the FPI route to circumvent minimum public shareholding norms.
The Sebi consultation paper comes days after a Supreme Court-appointed expert committee observed that the regulator is struggling to ascertain the identities of the ultimate beneficiaries in 13 suspected FPIs in Adani Group firms. “It would be a humongous task to figure out who the ultimate beneficial owner is,” the expert panel had said in its report.
Sebi on Wednesday observed this tightening may potentially impact FPI holdings of around ₹2.6 trillion worth of assets in India, adding that this constitutes around 6% of total FPI assets under management and less than 1% of India’s total market capitalization. Sebi has proposed a risk-based classification of funds based on the concentration levels of their portfolios. Funds falling under the highrisk list would need to provide granular details of beneficial ownership, Sebi added. Market participants can provide feedback on this paper to Sebi by 30 June.
“Trust and transparency will need to be balanced with ease of doing business in India. Recognizing the need for such balance, a risk-based approach has been proposed by Sebi. Certain high-risk FPIs may be asked to furnish granular data of all entities with any ownership, economic interest, or control rights on a full look-through basis,” said Suresh Swamy, a partner at Price Waterhouse and Co. LLP. “Fortunately, the exception list is wide enough and should not impact the majority of the FPIs,”
In the discussion paper, Sebi observed that certain funds were investing a substantial portion of their equity portfolio in a single company or a single group of companies. It further noted that in some cases, such holdings have remained nearly static for a long period of time.
“Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding,” Sebi said in the discussion paper. “If this were the case, the apparent free float in a listed company may not be its true free float, increasing the risk of price manipulation in such scrips.” Sebi rules say a promoter group cannot own more than 75% in a listed firm.
The market regulator proposed that any FPI holding more than 50% of its portfolio in a single corporate group would be considered a ‘high-risk’ FPI and would be required to provide additional beneficial ownership documents. Additionally, if the high-risk FPI has more than Rs 25,000 crore in India AUM, then the fund is required to provide the additional documents within six months.
Unlike normal beneficial ownership information that FPIs provide, the high-risk FPIs are required to provide the information “to the level of all natural persons and/ or Public Retail Funds or large public listed entities”.
In simpler words, this means such FPIs will have to provide details of beneficial owners till the final level.