Foreign portfolio investors (FPIs), who are mandated to liquidate their holdings as per the Securities and Exchange Board of India’s (Sebi) January-end deadline, will get seven months more to provide additional disclosures. In August last year, the markets regulator had asked FPIs, who were holding more than 50 per cent of their equity AUM in a single corporate group or with an overall holding in Indian equity markets of over Rs 25,000 crore, to disclose granular details of all entities holding any ownership, economic interest, or exercising control in the FPI. The norms were announced to prevent the possible round-tripping by certain promoters using the FPI route. Why has SEBI asked FPIs to provide additional disclosures? In its August circular, Sebi said certain FPIs have been observed to hold a concentrated portion of their equity portfolio in a single investee company/ corporate group. Such concentrated investments raise the concern and possibility that promoters of such investee companies/ corporate groups, or other investors acting in concert, could be using the FPI route to circumvent regulatory requirements such as that of disclosures under Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations) or maintaining Minimum Public Shareholding (MPS) in the listed company. The regulator said while Press Note 3 or PN3 issued by the government in April 2020 does not apply to FPI investments, there are concerns that entities with large Indian equity portfolios could potentially disrupt the orderly functioning of Indian securities markets by misusing the FPI route. To mitigate these concerns, a need was felt to obtain detailed information from FPIs. Join us for Explained Live event on India’s space ambition What additional details are required from FPIs? Sebi said granular details of all entities holding any ownership, economic interest, or exercising control in the FPI will have to be provided by FPIs. While economic interest means returns from the investments made by the FPI, ownership interest means ownership of shares or capital of the entity or entitlement to derive profits from the activity of the entity. Are all FPIs required to provide additional disclosures? No. Sebi has said FPIs holding more than 50 per cent of their Indian equity assets under management (AUM) in a single Indian corporate group or holding over Rs 25,000 crore of equity AUM in the Indian markets are required to disclose details. What is the timeline to meet the disclosure norms? According to the standard operating procedure (SOP) issued by FPI custodians on additional disclosure norms, existing FPIs, which are in breach of the investment limits as of October 31, 2023, would be required to bring down such exposure within 90 calendar days i.e. January 29, 2024 (settlement date), unless they fall under any of the exempted categories. However, sources said that FPIs will get seven more months to liquidate their holdings if they do not meet the January-end deadline to disclose data about their investors. “There is no immediate deadline or cliff for FPIs to liquidate any holdings,” sources said. If FPIs continue to meet the criteria for enhanced disclosures as of January end, they would have an added 10/30 working days to provide the additional details required, they said. “Even thereafter, if they fail to provide any details, they would have a further 6 months to reduce their holdings,” sources said. Some experts say that the recent withdrawal by FPIs from the domestic market may partly be to meet the end of January deadline of Sebi. So far in January, FPIs have sold Rs 24,734 crore worth of domestic shares, according to data from National Securities Depository Ltd (NSDL) Which FPIs are exempted from making additional disclosure? FPIs who are sovereign wealth funds (SWFs), listed companies on certain global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings, are exempted from making enhanced disclosures, sources said. What quantum of FPIs would come under Sebi's disclosure norms? In a consultation issued in May last year, Sebi had said that based on the data as of March 31, 2023, FPI assets under management of around Rs 2.6 lakh crore may potentially be identified as high-risk FPIs who would have to make additional disclosures. Sources said FPIs which may be required to provide enhanced disclosures are expected to be significantly less than estimated in the consultation paper and the SEBI board note. What is Press Note 3? During the Covid-19 pandemic, the government amended the foreign direct investment (FDI) policy through a Press Note 3 (2020) on April 17, 2020. The amendments were said to have been made to check opportunistic takeovers/acquisitions of stressed Indian companies at a cheaper valuation. The new regulations required an entity of a country, sharing a land border with India or where the beneficial owner of an investment into India is situated or is a citizen of any such country, to invest only under the Government route. Also, in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the said policy amendment, such subsequent change in beneficial ownership will also require government approval.
