High-risk FPIs Need To Follow SEBI's Enhanced Disclosure Norms from 1st February
Moneylife Digital Team 24 January 2024
With the market regulator Securities and Exchange Board of India (SEBI)'s deadline ending this month, high-risk foreign portfolio investors (FPIs) will have to submit additional disclosures from 1st February. According to a report from CNBC-TV18, the quantum for disclosures for these FPIs may be a lot less than projected earlier.
 
In its August 2023 circular, SEBI has prescribed that additional disclosures will not be required to be made by FPIs in case their investments are realigned with the specified thresholds. The provisions of the circular became effective from 1 November 2023.
 
According to the circular, FPIs, including their investor group, holding more than Rs25,000 crore of equity assets under management (AUM) in the Indian markets were given a timeline of 90 calendar days from the date on which such FPIs exceed the threshold. This deadline ends on 31 January 2024.
 
FPIs required to make disclosures as of the date of applicability of this circular have been given 90 calendar days from the date of applicability. "Accounts of all FPIs, individually or belonging to such investor group, shall be blocked for further equity purchases until the holding is brought below Rs25,000 crore of equity AUM in the Indian markets," SEBI says.
 
The market regulator has given a grace period of 10 days for such disclosures. In case the high-risk FPIs fail to make disclosures in the grace period, they would have to liquidate or rebalance their holding over the next six months to comply and move out of the high-risk category.
 
SEBI has prescribed that in case of FPIs holding more than 50% of their Indian equity AUM in a single Indian corporate group, the timeline is 10 trading days from the date on which such FPIs exceed the threshold.
 
Such FPIs cannot make fresh purchases of the equity shares of any company belonging to an Indian corporate group during the next 30 calendar days from the date on which the FPIs exceeded the threshold, SEBI says in the circular.
 
Further, the FPI needs to liquidate its securities and exit the Indian securities market by surrendering its FPI registration within 180 calendar days from the day the certificate becomes invalid, SEBI says.
 
During the 180 calendar days, the investee companies will restrict the FPI's voting rights to its actual shareholding or its shareholding corresponding to 50% of its equity AUM on the date its FPI registration is rendered invalid, whichever is lower.
 
After realignment, in case the FPI's holdings exceed the prescribed threshold on a subsequent date, the timeline for the FPI to realign with the limits will restart from the subsequent date, SEBI says.
 
Based on the data as of 31 March 2023, and on certain assumptions, SEBI estimates that FPI AUM of around Rs2.6 lakh crore, or about 6% of total FPI equity AUM and less than 1% of India's total equity market capitalisation, may potentially be identified as high-risk FPIs that meet either of the 50% group concentration or the Rs25,000 crore fund size threshold.
 
The market regulator says it observed that some FPIs concentrate a substantial portion of their equity portfolio in a single investee company or company group. In some cases, these concentrated holdings have also been near-static and not maintained for a long time. 
 
The background to the additional disclosures is that SEBI observed certain FPIs have been holding a concentrated portion of their equity portfolio in a single investee company or corporate group.
 
Such concentrated investments raise the concern and possibility that promoters of such investee companies or corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of disclosures under Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations) or maintaining minimum public shareholding (MPS) in the listed company.
 
Recognising the inherent risks of opportunistic takeover or acquisition of Indian companies, the government of India (GoI) had issued press note 3 (PN3) dated 17 April 2020. It requires an entity of a country that shares land border with India, or where the beneficial owner (BO) of an investment into India is situated in or is a citizen of any such country, to invest only under the government route.
 
While PN3 is not applicable to FPI investments, there are concerns that entities with large Indian equity portfolios could potentially disrupt the orderly functioning of Indian securities markets by misusing the FPI route, SEBI says.
 
Depositories are directed to introduce new freeze reason codes and stock exchanges need to put in place appropriate mechanisms or systems to ensure compliance with the above and to facilitate the blocking of the accounts of the FPIs.
 
For monitoring compliance with the 50% exposure limit in a single corporate group, a repository containing names of companies forming a part of each Indian corporate group, will be publicly disseminated on the websites of stock exchanges or depositories.
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