Following the Adani-Hindenburg issue, the market regulator Securities and Exchange Board of India (SEBI) has initiated measures to strengthen its oversight on foreign portfolio investors (FPIs) with an objective to prevent Indian promoters from bypassing the minimum public shareholding (MPS) norms.
According to a latest proposal by SEBI, FPIs classified as “high-risk” and are more likely in position to circumvent SEBI norms will be required to reveal granular data so that it can track the ultimate beneficiary of such FPIs.
SEBI’s investigation into Hindenburg’s allegations against Adani Group has hit a roadblock as many jurisdictions are unwilling to reveal granular data in the absence of any specific charges of wrongdoing against the FPIs. They even have termed SEBI’s demands for details as “fishing” queries.
Hence, SEBI has proposed new rules that will require high-risk FPIs to reveal granular data upfront.
According to the proposal, high risk FPIs and all their linked entities will have to reveal granular details of ownership, economic interest, or control rights on a full “look through” basis, up to the level of all natural persons and/ or public retail funds or large public listed entities.
Further, any material change in the same also has to be communicated by such FPIs to their depository participants in seven working days of such change. High risk FPIs which hold more than more than 50 percent of their equity Asset Under Management (AUM) in a single corporate group would be required to comply with the requirements for additional disclosures.
Even existing high-risk FPIs with an overall holding in Indian equity markets of over ₹25,000 crore will also be required to comply with additional granular disclosure requirements within 6 months, failing which the FPI should bring down its AUM below the said threshold within that time frame.
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.
According to the SEBI consultation paper, “high-risk” FPIs are those that are not classified as “low-risk” or “moderate-risk”.
Low-risk FPIs are those that are backed by governments and related entities such as central banks, sovereign wealth funds, etc. as the ownership, economic and control interest in such entities is known due to predominant ownership by the government of the respective country.
Pension funds and public retail funds are categorised as moderate-risk funds.
Categorisation of a FPI as “moderate-risk” is subject to the ability of depository participants to independently validate and confirm the status of such FPIs as pension funds and public retail funds with a wide and diverse investor base.
According to SEBI, some FPIs concentrated a substantial portion of their equity portfolio in a single investee company/group. In some cases, the 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 MPS regulations. 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.
To ensure that there is no such circumvention of MPS or other related regulations, it is necessary to obtain granular information related to the ownership, SEBI has said.
On an ongoing basis, high-risk FPIs that momentarily breach the 50 per cent group concentration investment threshold will be provided a window of 10 days to bring down such concentration, before the additional disclosure requirements become effective. At the time of registration, high-risk FPIs will be asked to submit an undertaking confirming that they have suitable mechanisms/agreements in place with their investors (on a full look through basis), which shall include waiving off their privacy rights in their respective home jurisdictions in favour of SEBI, to allow for submission of additional granular disclosures if any of the concentration or size threshold conditions were to be crossed.
Existing high-risk FPIs will have to submit such undertaking within 6 months of issuance of the guidelines. While the primary responsibility of monitoring the status vis-a-vis concentration and size thresholds shall rest with the FPI, the responsibility of monitoring the same, informing the FPI regarding exceeding the threshold, if any, rectification of the same and taking further actions would rest with the depository players.
“It is observed that some of the prima facie high-risk FPIs that crossed the 50 per cent investment threshold in a single group may have an India-oriented AUM that is relatively small vis-a-vis their global AUM across all their investments at a scheme level. Subject to the ability of DDPs to independently validate the same, such FPIs with a single India/ India-related corporate group exposure below 25 percent of their overall AUM at a scheme level may be reclassified as moderate risk rather than high-risk. They may therefore be exempt from any requirements of additional disclosures,” SEBI has said.
In addition, to aid portfolio formation, new FPIs that have just begun investments will be allowed to cross the 50 percent group concentration threshold up to a period of 6 months without the need for additional disclosures becoming effective. Beyond 6 months, however, any crossing of the 50 percent concentration threshold by such FPIs will trigger the requirement for additional disclosures.
Similarly, existing FPIs that are in the process of winding down their investments may temporarily breach the 50 percent investment threshold in a single corporate group, provided that the portfolio of such FPIs is wound down within 6 months and the need for additional disclosures will not apply in such cases.
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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.
SEBI has sought public comments on the proposed new rules.
According to the existing norms, when FPIs are coming from countries sharing a land border with India such as China, Pakistan and Bangladesh or the beneficial owner of an investment into India is situated in such countries, such investor has to take special permission from the Indian government while investing.
But such rules were being circumvented through the use of tax havens, sources said.