The Securities and Exchange Board of India (SEBI) is seeking to introduce new measures for enhancing the transparency of Foreign Portfolio Investors (FPIs), particularly those who hold significant equity stakes or concentrate their investments in single entities. SEBI recently issued a consultation paper that outlined these proposed regulations.
A concerning pattern has been observed where some FPIs heavily focus their equity portfolios in a single company or group. In numerous instances, these sizable holdings have remained relatively static and have been retained over extended periods.
FPI’s Concentrated Investments: Raising Regulatory Concerns
These large, concentrated investments trigger concerns regarding the potential misuse of the FPI route by company promoters or other investors who may act in concert to evade regulations, specifically those pertaining to maintaining Minimum Public Shareholding (MPS). This practice could distort the real picture of the free float of a listed company, resulting in an increased risk of price manipulation.
In an attempt to curb the evasion of regulations like MPS, SEBI has proposed implementing enhanced transparency measures. The objective is to fully identify all holders of ownership, economic, and control rights, particularly for those FPIs that are objectively considered high risk based on specific criteria.
Increased Transparency Measures: Classification of FPI Risk
SEBI’s paper suggests classifying FPIs into three risk categories: high, moderate, and low. It proposes that all FPIs, excluding government and government-related entities such as central banks, sovereign wealth funds, and pension funds or public retail funds, be categorized as high risk.
The mandated disclosures are to be uninhibited by any materiality thresholds established by the Prevention of Money Laundering (PMLA) rules and FPI regulations.
This consultation paper follows allegations made in a research report earlier this year by US-based short seller Hindenburg, which suggested that certain FPIs held significant stakes in the Adani Group’s listed companies. The Group has since refuted these allegations.
Aiming to Prevent MPS Evasion
The discussion document from SEBI implies that FPIs that are classified as high-risk, those who have invested over half their equity assets in a single business group, would be required to adhere to more stringent disclosure standards. Moreover, the paper outlines that if an FPI’s investment in a single Indian corporate entity falls below a quarter of their total managed assets, they could be re-designated as a moderate risk, and as a result, be exempted from the need for enhanced disclosures.
The paper also presents a provision for new FPIs, allowing them to exceed the 50% group concentration threshold for a period of up to six months without necessitating additional disclosures. However, any violation of this threshold after six months will trigger the requirement for further disclosures.
Existing FPIs winding down their investments can temporarily breach the 50% investment threshold without additional disclosure requirements, provided that they completely wind down their portfolio within six months.
SEBI’s latest proposal carries significant implications for non-compliant FPIs. Should these entities fail to deliver the mandatory disclosures, their FPI registration risks being revoked, compelling them to wrap up their operations within a span of half a year.
Further, the proposal stipulates that high-risk FPIs, whose holdings in the Indian equity market surpass Rs 25,000 crore, adhere to the enhanced disclosure requirements within a six-month timeframe. In the event of non-compliance, these FPIs would be obliged to decrease their AUM to a figure below this predefined threshold.
SEBI’s proposed regulations represent an attempt to bring greater transparency to FPIs and to safeguard India’s equity market from potential regulatory evasion and price manipulation.