Active Stocks
Fri Sep 22 2023 15:58:38
  1. Tata Steel share price
  2. 126.7 -0.86%
  1. HDFC Bank share price
  2. 1,529.2 -1.57%
  1. State Bank Of India share price
  2. 598.1 1.67%
  1. Power Grid Corporation Of India share price
  2. 199.1 -1.34%
  1. Tata Motors share price
  2. 621.1 -0.93%
Business News/ Markets / Stock Markets/  Sebi moves to deter promoters from misusing FPI route

NEW DELHI : The Securities and Exchange Board of India (Sebi) has proposed that foreign portfolio investors (FPIs) with investments concentrated in a single stock or stocks of a business group should provide granular information on beneficial ownership to custodians.

India’s markets regulator proposed tightening of disclosure requirements for offshore funds in a consultation paper released on Wednesday. The move is intended to prevent promoters of Indian companies from abusing the FPI route to circumvent minimum public shareholding norms.

The Sebi consultation paper comes days after a Supreme Court-appointed expert committee observed that the regulator is struggling to ascertain the identities of the ultimate beneficiaries in 13 suspected FPIs in Adani Group firms. “It would be a humongous task to figure out who the ultimate beneficial owner is," the expert panel had said in its report.

Sebi observed this tightening may potentially impact FPI holdings of around 2.6 trillion worth of assets in India, adding that this constitutes around 6% of total FPI assets under management and less than 1% of India’s total market capitalization.

Sebi has proposed a risk-based classification of funds based on the concentration levels of their portfolios. Funds falling under the high-risk list would need to provide granular details of beneficial ownership, Sebi added.

Market participants can provide feedback on this paper to Sebi by 30 June.

“Trust and transparency will need to be balanced with the ease of doing business in India. Recognizing the need for such balance, a risk-based approach has been proposed by Sebi. Certain high-risk FPIs may be asked to furnish granular data of all entities with any ownership, economic interest, or control rights on a full look-through basis," said Suresh Swamy, a partner at Price Waterhouse and Co. LLP. “Fortunately, the exception list is wide enough and should not impact the majority of the FPIs."

In the discussion paper, Sebi observed that certain funds were investing a substantial portion of their equity portfolio in a single company or a single group of companies. It further noted that in some cases, such holdings have remained nearly static for a long period of 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 for circumventing regulatory requirements such as that of maintaining minimum public shareholding," Sebi said in the discussion paper. “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." Sebi rules say a promoter group cannot own more than 75% in a listed firm.

Sebi proposed that any FPI holding more than 50% of its portfolio in a single corporate group would be considered a ‘high-risk’ FPI and would be required to provide additional beneficial ownership documents. Additionally, if the high-risk FPI has more than 25,000 crore in India AUM, then the fund is required to provide the additional documents within six months.

Unlike normal beneficial ownership information that FPIs provide, the high-risk FPIs are required to provide the information “to the level of all natural persons and/or Public Retail Funds or large public listed entities". This means such FPIs will have to provide details of beneficial owners till the final level.

The market regulator also observed the FPI route could be potentially misused to circumvent the provisions of Press Note 3 of 2020. According to the note, any investor who belongs to a country that shares borders with India must obtain prior approval from the Indian government before making any investment under the foreign direct investment (FDI) route. This provision, however, doesn’t apply to listed equity investments made by FPIs. “While Press Note 3 is not applicable to FPI investments, the FPI route could potentially be misused to circumvent the stipulations of Press Note 3," Sebi added in the paper.

If any FPI declines to make such additional disclosures, their FPI licence will be declared invalid, and the fund will have to liquidate all its India holdings within six months, Sebi added.

Beneficial ownership has been a controversial topic for a long time, with regulators often insisting on more information while investors try to duck such queries. Foreign funds have generally been wary of sharing investor information with Indian authorities. This is on account of data-privacy concerns and various international laws.

“On the face of it, the proposal may appear to be discouraging to the concerned FPIs, but it is necessary to know for the regulator/enforcement agencies and public shareholders if any such FPIs are acting as “front" for the promoter(s) of a listed company," said Yogesh Chande, a partner at Shardul Amarchand Mangaldas and Co.

"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 01 Jun 2023, 12:04 AM IST
Next Story
Recommended For You

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App