Editorial. SEBI should stop with leeway to university FPIs

Markets regulator Securities and Exchange Board of India (SEBI) had recently released a consultation paper seeking feedback on relaxing the additional disclosure framework for FPIs, stipulated last August. The regulator is proposing to exempt two categories of FPIs from granular disclosure of beneficial ownership — university funds and university-related endowments and FPIs which have concentrated exposure in companies with no identifiable promoter groups.

These exemptions appear justified as there is lower risk of these entities flouting the minimum public shareholding rules through such holdings. The paper proposes safeguards to ensure that these relaxations are not misused. There is a case for exempting university funds and university-related endowments from the additional disclosure norms. Since many enjoy tax exemptions, they are well-supervised in their jurisdictions. SEBI is taking further precautions by stating that only those university funds which qualify to register as category I FPI, associated with one of the top 200 universities as per latest QS world university rankings, with India AUM (assets under management) less than 25 per cent of their global AUM and global AUM more than ₹10,000 crore are exempted from these disclosures. These caveats are likely to ensure that only the largest and well diversified university funds, tied to reputed universities, are exempted.

The other proposed exemption — for FPI investment in companies with no promoter — can also be allowed as the entire shareholding of these companies belongs to the public, and breach of the minimum public shareholding norm is not possible. Further, the reason why the regulator originally sought this information was to establish the link between the promoter group and the FPIs investing in them. In the absence of a promoter, these additional disclosures may be irrelevant. But the regulator must be careful not to relax additional disclosure rules any further. SEBI mandated granular details of all entities owning, controlling or having economic interest in an FPI on a look-through basis last August. These disclosures are needed when the foreign investor holds over 50 per cent of its Indian equity assets in a single Indian group or holds more than ₹25,000 crore of Indian equity assets.

These rules were a result of allegations made in the Hindenburg report on the Adani group that the foreign investors in many of the Adani stocks were related to family members or close associates. The regulator was unable to establish the allegation due to gaps in regulations on disclosing FPI ownerships. It is therefore important that these rules are enforced effectively to prevent round-tripping or stock price manipulation through FPI entities owned by Indian promoter groups. Once the disclosures are made by FPIs by the specified deadline of March 11, 2024 (today), their veracity must be established by an independent authority. There are likely to be demands from several categories of foreign portfolio investors to exempt other categories too. It’s best that SEBI does not accede to such demands.

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