Amidst the Adani-Hindenburg row, market regulator Securities and Exchange Board of India (SEBI) has issued a consultation paper seeking enhanced transparency measures for foreign portfolio investors (FPI).
The SEBI paper seeks to enhance trust in the Indian securities markets by mandating additional granular disclosures around ownership of, an economic interest in, and control of objectively identified high-risk FPIs that have either concentrated single group exposures and/ or significant overall holdings in their India equity investment portfolio.
The consultation paper is on the framework for mandating additional disclosures from FPIs that fulfil certain objective criteria to guard against possible circumvention of minimum public shareholding (MPS) and misuse of the FPI route to circumvent the requirements of press note 3 (PN3).
According to the market regulator, guarding against these two potential issues requires granular details around the ownership of, an economic interest in, and control of certain high-risk FPIs. Such disclosures must be unconstrained by any materiality thresholds set by the Prevention of Money Laundering Act (PMLA) rules and FPI regulations, it says.
In addition, SEBI says, within FPI regulations, while beneficial owners’ (BO) details, based on control or fund ownership, have generally been made available, it is often observed that no natural person is identified as the BO of FPIs based on economic interest since each investor entity in the FPI is generally found to be below the threshold prescribed under PML rules. However, there is a possibility that the same natural person holds a significant aggregate economic interest in the FPI via different investment entities, each of which is individually below the threshold for identification as a BO.
Based on the data as of 31 March 2023, and on certain assumptions, SEBI estimates that FPI assets under management (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.
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 to circumvent regulatory requirements such as that of maintaining 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.
"To confirm that there is no such circumvention of MPS or other related regulations, it is necessary to obtain granular information around the ownership of, an economic interest in, and control of FPIs with concentrated equity holdings in single companies or business groups," SEBI says.
As per the paper, high-risk FPIs, holding more than 50% of their equity AUMs in a single corporate group would need to provide granular data of all entities with any ownership, economic interest, or control rights on a full look through basis up to the level of natural persons and or public retail funds or large public listed entities.
Talking about the potential misuse of the FPI route for circumvention of PN3 stipulations, the market regulator says there is a need to identify investors in high-risk FPIs with large equity portfolios at a granular level, whose investors may be based out of land-bordering countries. In certain instances, SEBI says it has observed that while the high-risk FPI may be situated out of a non-land-bordering country, the investors in such high-risk FPIs may be based out of the land–bordering countries.
To mitigate the risk of circumvention of regulations such as MPS and to prevent potential misuse of the FPI route to circumvent PN3 stipulations, the consultation paper proposes enhanced transparency measures for fully identifying all holders of ownership, economic, and control rights that may be mandated for certain objectively identified high-risk FPIs that fulfil certain criteria.
"Specifically, such identification should be done on a look-through basis down to the level of natural persons, public retail funds, or large listed corporates, without applying any materiality thresholds, and notwithstanding any equivalent PMLA rules or secrecy laws that may be applicable in other jurisdictions of their domicile, including tax havens, if any," SEBI says.