Why EPFR’s Cameron Brandt isn’t worrying about tighter SEBI rules for FPIs

Cameron Brandt, Director of Research at EPFR Global, remains unfazed by the recent selloff in Indian equities by Foreign Portfolio Investors (FPIs). The selloff is attributed new regulatory disclosure norms introduced by the Securities and Exchange Board of India (SEBI). So far in January 2024, FPIs have net sold approximately ₹16,600 crore of Indian equities.  

The new SEBI regulations require FPIs to disclose details of entities holding ownership, economic interest, or control in the fund. Particularly, FPIs with over 50% of their assets under management (AUM) in a single Indian corporate group, and those with more than ₹25,000 crore of equity AUM in Indian markets, must comply with these norms.

The deadline for the FPI beneficiary ownership regulations, announced in August 2023, is February 1,  2024, and this has triggered nervousness in equities. India's benchmark indices, Sensex, Nifty fell over a percent each on January 23, with the Nifty 50 closing below its recent swing low of 21,285. The Sensex also shed over 1,000 points at the start of the truncated week.  Both the benchmark indices were trading flat today (January 24).

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The guidelines were established by SEBI with an aim to protect investors from potential evasion of Minimum Public Shareholding (MPS) regulations. SEBI expressed concerns that high levels of investment concentration might indicate collaborative actions by promoters of these corporate groups. Such coordination could mean that the publicly traded shares of a company don't accurately represent its actual market availability, leading to an increased risk of market price manipulation in these stocks.

In March 2023, SEBI's discussion paper highlighted ₹2.6 lakh crore of 'high-risk' foreign funds, necessitating additional disclosures. The norms exclude certain categories of FPIs, such as Sovereign Wealth Funds (SWFs), listed companies on global exchanges, public retail funds, and funds with significant investments in companies without identifiable promoters.

"....there are, periodically, initiatives within Indian financial regulation that sort of worry foreign investors. But, as I understand it, there's several months before it's implemented...it really hasn't impacted the flow...I would be disinclined to put too much weight on it just now," Brandt said discussing the likely impact of the norms on the foreign fund flows into Indian markets.

According to CNBC-TV18 sources, the new SEBI rule may impact fewer funds than initially anticipated.

Brandt noted that there are still consistent inflows into India dedicated funds despite the expectations of a fairly bumpy first quarter due to global uncertainties.

"...there are elections, there is also a sort of back and forth on when and to what degree the European Central Bank and the US Federal Reserve will start cutting interest rates, and obviously, the geopolitical tensions in the Middle East. So even though I think that looks very concerning, especially when linked to some of the FII outflows you've (India) seen recently, I would be disinclined to put too much weight on it just now," Brandt said.

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