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Source: The post is based on the article “Concentration concerns – Sebi’s proposal will make FPIs more transparent” published in Business Standard on 2nd June 2023.
Syllabus: GS 3 – Indian Economy – Capital Markets
Relevance: About new additional disclosure requirements for FPIs.
News: The Securities and Exchange Board of India (Sebi) has published a consultation paper that proposes new additional disclosure requirements for foreign portfolio investors (FPIs).
What is the current requirement for additional disclosures for FPIs?
Currently, Sebi proposes that high-risk FPIs holding more than 50 percent of assets under management (AUM) in a single corporate group would be required to comply with requirements for additional disclosures, if such concentration exceeds a temporary window of 10 days.
Such FPIs would have to provide the granular data of all entities with any ownership, economic interest, or control rights.
However, this requirement is qualified by exempting newly registered FPIs for the first six months and FPIs that are currently undergoing the winding-up process.
What are the new additional disclosure requirements for FPIs proposed by Sebi?
The new additional disclosure requirements primarily focus on identifying the true beneficial owners of shares held by concentrated FPIs.
The aim is to prevent potential evasion of minimum public shareholding (MPS) regulations and misuse of the FPI route to bypass Press Note 3 (PN3) guidelines.
The paper is likely a response to the Hindenburg Research incident, where a US-based short seller accused the Adani Group of using FPIs as proxies to hold shares in listed companies, exceeding the maximum promoter shareholding limit of 75%.
What is PN3 guidelines and why has Sebi come up with new additional disclosure requirements?
The PN3 mandates that entities of nations sharing land borders with India, or where the beneficial owner of an investment in India is situated, or is a citizen of any such country, can invest only via the government route.
Sebi is concerned that entities of these nations may use FPIs as a means to hide their ownership of Indian shares.
The consultation paper also highlights that some FPIs concentrate a significant portion of their equity portfolio in a single company or a group of companies.
Such concentrated investments raise suspicions that promoters or other investors acting together may exploit the FPI route to evade regulations. This could increase the risk of price manipulation.
What can be done to prevent evasion?
In order to investigate if concentrated holdings exist, it will be necessary to compile a list of FPIs with such patterns along with obtaining detailed information about the ownership, economic interest, and control of these FPIs.
Existing legislation, such as the Prevention of Money Laundering Act, 2002, and the Prevention of Money Laundering (Maintenance of Records Rules), 2005, provides a framework for identifying beneficial owners.
However, in practice, it is challenging to apply these regulations due to the complex ownership structures often employed by such entities.