The deadline for India's markets regulator Sebi’s mandate to secure additional disclosures from ‘high risk’ foreign portfolio investors (FPIs) ends on February 1. Sebi released its consultation paper on enhanced disclosures from high-risk FPIs in May 2023. This was taken up in the regulator's June board meeting and a final circular was issued in August 2023.
The circular mandated a 90-day period starting November 2023 for FPIs to submit granular details on ownership of, economic interest in and control of some objectively identified high-risk FPIs which either have concentrated single group exposure and/or significant overall holdings in India equity investment portfolio.
Certain FPIs have been observed to hold a concentrated portion of their equity portfolio in a single investee company/corporate group. Such concentrated investments raise the concern and possibility that promoters of such investee companies/corporate groups, or other investors acting in concert, could be using the FPI route to circumvent 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.
WHY ENHANCED DISCLOSURES FROM HIGH-RISK FPIs?
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.
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 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. To confirm that there is no such circumvention of MPS or other related regulations, it was necessary to obtain granular information about the ownership of, economic interest in, and control of FPIs with concentrated equity holdings in single companies or business groups.
Further, having granular details on the ultimate beneficiary for various high-risk FPIs also protects against risks of opportunistic takeover/acquisition of Indian companies.
GRANULAR DETAILS FROM HIGH-RISK FPIs PROTECTS AGAINST |
1 | 2 |
Circumvention Of Minimum Public Shareholding Regulations
| Circumvention Of SAST Regulations (Any Opportunistic Takeover Of Indian Cos)
|
WHICH FOREIGN PORTFOLIO INVESTORS ARE ‘HIGH RISK’?
Sebi has made an objective selection of certain FPIs which qualify to be under the ‘high-risk’ category. The identification was done based on two important criteria points.
The first ones would be the FPIs which have 50% of their India Assets Under Management (AUM) in one single corporate group. The second set of FPIs identified under the ‘high-risk’ category would be the ones which have over ₹25,000 crore AUM in the Indian equity market.
FOREIGN PORTFOLIO INVESTORS IDENTIFIED UNDER THE HIGH-RISK CATEGORY |
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FPIs which have 50% of their India AUM in one single corporate group | FPIs which have over ₹25,000 crore AUM in Indian equity market |
AUM SHARE FROM HIGH-RISK FPIs
In its consultation paper, Sebi estimated high-risk FPI AUM to be around ₹2.6 lakh crore (as of March 31, 2023) which would be around 6% of total FPI AUM and 1% of Indian market capitalisation.
The base since then of FPI has certainly increased but sources suggest that FPIs which may be required to provide enhanced disclosures are expected to be significantly less than estimated in the consultation paper and the Sebi board note.
TIMELINE FOR IMPLEMENTATION AND EXTENSIONS
Sebi first floated a consultation paper on enhanced disclosures from high-risk FPIs in May 2023, which finally got approved by Sebi’s board in June 2023. Sebi had given time till January 31 for these identified high-risk FPIs to disclose granular details on their ultimate beneficial ownership.
If these identified FPIs are not able to disclose the required details by January 31, there is a grace period of another 10 days which will be till February 10 to make the needed disclosures.
Even after February 10, there is no immediate deadline or cliff for these high- risk FPIs as they would have another six months starting February 10 to liquidate or rebalance their holding to comply and move out of the high-risk category.
Again, to be specific, Sebi’s intention or motive is not to make FPIs in the high-risk category liquidate their holding but the intention is to only have details on the ultimate beneficial ownership.
FPIs EXEMPTED FROM MAKING ENHANCED DISCLOSURES
The markets regulator has also granted a list of exemptions to FPIs which get categorised under the high-risk segment. These FPIs will be exempted from providing the required granular details on ownership of, economic interest in and control of these FPIs. FPIs falling in the below-mentioned categories will be exempted from providing the required granular details.
▪️Government & Government Related Entities Like Central Banks, Sovereign Wealth Funds
▪️Pension Funds, Public Retail Funds
▪️FPIs Having A Broad-Based Pooled Structure With Widespread Investor Base
▪️ETF With Less Than 50% Exposure To India & India-Related Equities
▪️FPIs Whose Holding In An Indian Corporate Is Below 25% Of Overall Global AUM At Scheme Level
▪️FPIs Whose India Equity AUM Is Below 50% Of Overall Global AUM At the Scheme Level
▪️FPIs Unable To Liquidate Excess Investment Due To Restrictions Like IPO Lock-in, Moratoriums
▪️Newly Registered FPIs, First 90 Days From The Date Of Settlement Of First Trade In India
