Why has SEBI proposed additional disclosure norms for ‘high-risk’ FPIs?

SEBI said there is a need for additional disclosures for certain types of FPIs in order to have greater investor protection, and for fostering greater trust and transparency in the Indian securities market ecosystem. The paper has mandated additional disclosure norms from these FPIs to guard against possible circumvention of Minimum Public Shareholding (MPS), and to prevent possible misuse of the FPI route to circumvent the requirements of Press Note 3 (PN3). SEBI said such disclosures must be unconstrained by any materiality thresholds set by the PMLA (Prevention of Money Laundering) rules and FPI regulations.

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, are proposed to be categorized as high-risk FPIs.

The consultation paper comes shortly 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.

What has SEBI proposed?

To mitigate the risk of circumvention of regulations such as MPS, and to prevent potential misuse of the FPI route to circumvent Press Note 3 stipulations, the markets regulator has proposed that enhanced transparency measures for fully identifying all holders of ownership, economic, and control rights may be mandated for certain high-risk FPIs.

It 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.

Also, the existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will also be required to comply with new disclosure requirements. They will have to follow the new norms within 6 months, failing which the FPI will have to bring down its AUM below the threshold within a time frame.

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 made to check opportunistic takeovers/acquisitions of stressed Indian companies at a cheaper valuation.

The new regulations required an entity of a country, sharing 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.

How are FPIs circumventing MPS regulations?

SEBI 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 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 consultation paper said.

How is the FPI route misused for circumvention of PN3 regulations?

SEBI said while Press Note 3 is not applicable to FPI investments, the FPI route could potentially be misused to circumvent the stipulations of Press Note 3. It said there is a need to identify investors in high-risk FPIs with large equity portfolios at a granular level, whose investors may be based out of land bordering countries. In certain instances, it has been observed that while the high-risk FPI itself may be situated out of a non–land bordering country, the investors in such high-risk FPIs may be based out of land–bordering countries.

Will the proposed norms be applicable to FPIs?

The capital markets regulator said the proposed additional requirements are for high-risk FPIs and will not impact low-risk and moderate-risk FPIs in any manner.