Market regulator Sebi has proposed to tighten disclosure standards for high-risk FPIs that own more than 50 per cent or more of their equity assets under management in a single corporate entity. They will be required to make additional disclosures around the ownership of, and economic interest in, and control of such funds.
In a consultation paper floated on Wednesday, the Securities and Exchange Board of India (Sebi) said the disclosures will have to be made up to the level of all natural persons and/ or public retail funds or large public listed entities.
The same has also been proposed for FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore.
These proposals are aimed at preventing possible circumvention of minimum public shareholding (MPS) requirements and potential misuse of the FPI route to guard against the inherent risks of opportunistic takeover of Indian companies, Sebi said in its consultation paper.
However, they come after a Supreme Court-appointed panel said the market regulator has drawn a blank in its probe regarding alleged violations of foreign investments in the Adani group.
The slammed the regulator for “diluting” regulations in 2019 governing the disclosure of the last natural person behind a byzantine network of opaque entities routing investments into the market and certain entities of large conglomerates.
The panel had said a piquant situation had arisen after regulation and enforcement were pulling in different directions and blamed this gridlock on a deliberately hatched chicken-and-egg situation.
``It is clear that this consultation paper has its genesis in the Adani stocks issue where Sebi couldn’t identify the beneficial owners of some foreign portfolio investments in Adani stocks since the existing regulations are lax in identifying the true owners of many investments,’’ V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said.
The discussion paper said: “Some FPIs have been observed to concentrate a substantial portion of their equity portfolio in a single investee company/ company group. In some cases, these concentrated holdings have also been near static and maintained for a long 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 (MPS). 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.”
The paper recommends a risk-based classification of FPIs:
* Low risk: Government entities such as sovereign funds and central bank funds will qualify
* Moderate risk: Pension or public retail funds with a diverse investor base
* High risk: All other FPIs
The high-risk FPIs need to provide the details of their operational structure if they hold more than 50 per cent in a single group.
In the case of entities with moderate risk, the onus is on the DDP (designated depository participants or custodians) to validate and confirm the status of such entities as pension or public retail funds with a wide and diverse investor base.
However, the market regulator also provided relief to the high-risk FPIs in meeting the additional disclosure requirements. It remains to be seen if this is used as a loophole to evade the tighter rules.
The discussion paper said there could be FPIs that have an India-dedicated AUM which accounts for a small part of its global AUM. In such cases, the market regulator said that even if the 50 per cent threshold is met with regard to the India-oriented AUM, they can be classified as moderate risk and additional requirements will not be needed.
However, this will apply only if the exposure to the Indian corporate group is below 25 per cent of their overall AUM.
The regulator has suggested certain threshold relaxation for global entities with higher AUMs as well as for newly-established FPIs for the first six months.