SEBI proposes additional disclosure for high-risk foreign portfolio investors

Such concentrated investments in a single investee company or group 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), the consultation paper said. 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, it said.

“To mitigate the risk of circumvention of regulations such as MPS, and to prevent potential misuse of the FPI route to circumvent, it is proposed that enhanced transparency measures for fully identifying all holders of ownership, economic, and control rights may be mandated for certain objectively identified high-risk FPIs that fulfil certain criteria,” the consultation paper said.

The paper has proposed to categorize FPIs into high, moderate and low risk. All FPIs except for government and government related entities such as central banks, sovereign wealth funds, and pension funds or public retail funds will be categorized as high risk FPIs.

It said that such disclosures must be unconstrained by any materiality thresholds set by the PMLA (Prevention of Money Laundering) rules and FPI regulations.

The consultation paper comes a few months after the US-based short seller Hindenburg in its research report, released in January this year, had alleged that some FPIs held a significant stake in the listed companies of the Adani Group. The Group has denied these allegations.

“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,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

For prevention of circumvention of MPS, the SEBI’s consultation paper has proposed that high-risk FPIs, holding more than 50 per cent of their equity Asset Under Management (AUM) in a single corporate group, would be required to comply with the requirements for additional disclosures.

FPIs with a single India/ India-related corporate group exposure below 25 per cent of their overall AUM at a scheme level may be reclassified as moderate risk and may therefore be exempt from any requirements of additional disclosures, the paper said.

It said that the new FPIs that have just begun investments will be allowed to cross the 50 per cent group concentration threshold up to a period of six months without the need for additional disclosures. Beyond 6 months, however, any crossing of the 50 per cent concentration threshold by such FPIs will trigger the requirement for additional disclosures.

The need for additional disclosures will not apply in cases where existing FPIs that are in the process of winding down their investments. They may temporarily breach the 50 per cent investment threshold in a single corporate group, provided that the portfolio of such FPIs is wound down within six months, it said.

Existing high-risk FPIs that have more than the 50 per cent concentration threshold in a single corporate group will be provided a window of six months to bring down such exposure below 50 per cent, before the need for additional disclosure requirements become effective.

“Failure to provide such additional granular disclosures wherever required will render the FPI registration invalid. Such FPIs would be required to wind down within 6 months,” the paper recommended.

The paper proposed that existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will be required to comply with additional granular disclosure requirements within 6 months, failing which the FPI should bring down its AUM below the threshold.

High-risk FPIs that cross the Rs 25,000 crore AUM threshold in the future will be required to comply with additional granular disclosure requirements within 3 months of the event, failing which the FPI should bring down its AUM below the threshold within the time frame.

As per the consultation paper, as of March 31, 2023 FPI AUM of around Rs 2.6 lakh crore (or around 6 per cent of total FPI equity AUM, and less than 1 per cent of India total equity market capitalization) may potentially be identified as high-risk FPIs that meet either of the 50 per cent group concentration or the Rs 25,000 crore fund size thresholds.

The markets regulator clarified that the proposed additional disclosure requirements will not impact low-risk and moderate-risk FPIs in any manner.

Sebi has sought comment on the consultation paper till June 20.