Sebi proposes ‘high-risk’ FPIs with concentrated holdings to make more ownership disclosures

Markets regulator Securities and Exchange Board of India (Sebi) on Wednesday released a consultation paper seeking enhanced transparency measures for foreign portfolio investors (FPIs). FPIs with a Rs 25,000 crore equity holding in India must make additional disclosures, it said.

With the new rules, the markets regulator is aiming to prevent violation of Minimum Public Shareholding norms and to guard against possible misuse of the FPI route for the opportunistic takeover of Indian companies.

The regulator has proposed that for now, high-risk FPIs, holding more than 50 per cent of their Asset Under Management (AUM) in a single corporate group would be required to comply with the requirements for additional disclosures up to the level of all natural persons and/ or Public Retail Funds or large public listed entities.

“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,” the Sebi consultation paper said.

“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 Minimum Public Shareholding (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 paper said.

Also, Sebi has proposed that existing high-risk FPIs with an overall holding in Indian equity markets of over Rs. 25,000 crore shall also be required to comply with additional granular disclosure requirements within 6 months, failing which the FPI should bring down its AUM Rs 25,000 crore within that time frame.

“The additional disclosure would include granular data of all entities with any 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 needs to be communicated by the FPIs to their designated depositary participants within 7 working days of such change,” the Sebi paper said.

The consultation paper also suggests identifying FPI ownership on a look-through basis, enabling better tracking and monitoring of their activities.

“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-à-vis their  global AUM  across all their  investments at  a scheme level,” said the consultation paper.  

“Subject to  the ability of DDPs  to independently  validate the  same,  such  FPIs with a  single India/ India-related corporate  group exposure  below 25 per cent 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,” it added.

The paper identified government and government-related entities, such as central banks, sovereign wealth funds, etc. as low-risk FPIs since the ownership, economic, and control interest in such entities is known due to predominant ownership by the government of the respective country.

Pension Funds or Public Retail Funds have been clubbed under the moderate-risk FPIs. All FPIs that do not fulfill the above criteria are classified as high-risk FPIs.

The new paper by the market regulator assumes greater importance in light of the accusations made by Hindenburg Research against the Adani Group. Besides accusing the group of brazen stock manipulation and accounting frauds, the Hindenburg report highlighted that many of the funds investing in the listed Adani companies’ universe have concealed their ultimate beneficial ownership with nominee directors.

Also read: Finfluencer PR Sundar breaks silence on Sebi settlement, says ‘people who believe you need no explanation’

Also read: Setback for Vedanta-Foxconn chip venture as government poised to deny crucial funding: Report