Indian equity markets have been witnessing a correction over the last two months led by foreign portfolio investors selling around ₹38,000 crore of Indian shares in this period. While the selling is partly due to hardening US treasury bond yields and geopolitical problems, some are also pointing to the new SEBI guidelines for FPIs, which will come into force from today, as the trigger for this sell-off. The new rules restrict FPI holding in assets of a single Indian corporate group to 50 per cent and overall investment of each FPI in Indian equity to ₹25,000 crore.

FPIs with such large, concentrated exposures must disclose granular details of all entities either owning, having control or economic interest in them, to the regulator. While there are voices asking for dilution of these rules or extension of the deadline, SEBI should stay firm for these rules are long-overdue to sanitise the foreign portfolio route. It may be recalled that this guideline is a fallout of the Hindenburg research report on the Adani group which alleged that 12 foreign portfolio investors who were part of the public shareholders of companies in the Adani group were indirectly owned by either Gautam Adani or his close family members. Given the large gaps in the disclosure requirements regarding ultimate beneficial owners of FPIs, and the relaxations provided to FPIs over the years, it was difficult for the regulator to check the veracity of the allegations.

This is the apt opportunity for the regulator to do a course correction. These rules will not only help in SEBI’s investigation into the Hindenburg allegations, but will also provide ownership data of other groups with similar concentrated holdings by foreign portfolio investors. This data, along with the right to use the ‘look through’ principle to determine the ultimate beneficial owner, will enable the regulator to pin down the promoters flying under the radar by maintaining their stake below the regulatory threshold. SEBI should not get fazed by FPI selling for such corrections are par for the course and the exit of these so-called FPIs is desirable for the equity market. Moreover, SEBI’s actions are already beginning to have the desired effect.

A story in this newspaper noted that FPI holdings in several Adani group companies have dropped significantly in the September 2023 quarter. Elara India Opportunities Fund, APMS Investment Fund and Cresta Fund, which are alleged to have links to Adani family members, have reduced their holding in Adani group stocks significantly. SEBI had stated that 2 per cent of the 11,000-plus FPIs may be impacted by these new norms. Other FPIs having similar concentrated exposures would also have reduced their holding to avoid scrutiny. With most of the selling related to this transition behind us, the regulator should ensure that the information received is used to prevent markets from becoming a conduit for roundtripping.

comment COMMENT NOW