BackWhy Sebi must ask FPIs to be more transparent
A listed company needs to have a MPS of 25% to ensure sufficient market depth, to avoid market manipulations and to enable meaningful shareholders’ democracy.
PremiumA listed company needs to have a minimum public shareholding (MPS) of 25% to ensure sufficient market depth, to avoid market manipulations and to enable meaningful shareholders’ democracy. Let us for instance consider the case of a promoter already holding nearly 75% of shares of a listed company and wants to gain more control over his entity. The promoter may be tempted to set up some entities, preferably abroad, have some step-down entities under them, preferably strewn across tax havens, and then buy some shares of the company from the market in the guise of foreign portfolio investors (FPIs) who can be categorized as public. The term ‘FPI’ encompasses a wide range of Sebi-registered foreign investors—right from foreign governments to regulated entities like foreign banks, insurance companies to endowments and foundations to unregulated funds, subject to conditions.
History tells us that hiding behind layers of entities is how one attempts to escape the rigours of law enforcement when perpetrating high-profile frauds or tax evasion. Peeling off these layers has become a high priority for regulators. This can be seen in requirements like section 90 of the Companies Act, 2013, mandating companies to report their significant beneficial owners (SBOs). Simplistically, SBOs are individuals who indirectly own at least 10% of the company taken along with direct holdings, or those who exercise indirect control or significant influence. Among others, the Prevention of Money Laundering Act, 2002, requires reporting entities like banks, financial institutions and intermediaries to identify and verify the identity of the beneficial owners (BO) behind their clients. The threshold holding for identifying the BOs based on economic interest in companies and trusts is now 10%, down from 25% earlier.
All this will ensure that there is no violation of MPS or takeover norms and other such rules. The responsibility of identifying BOs has already been cast on designated depository participants (DDPs) through which FPI investments are routed. However, identification gets triggered only when the percentage thresholds of ownership interest are met at the FPI level. If an individual holds economic interest through multiple entities in an FPI such that each holding is below the threshold, it may go undetected. The present regulatory framework, although rigorous, seems to fall short.
Sebi floated a consultation paper in May for strengthening of FPI disclosure norms, which has been operationalized in its August circular, effective 1 November. Instead of a blanket mandate for all FPIs, Sebi has discerningly required only those FPIs breaching specified thresholds to make granular disclosures on ultimate ownership or control.
To combat MPS and other violations, FPIs holding over 50% of equity assets under management (AUM) in a single corporate group, and those having, along with their investor group, overall Indian equity AUM of over ₹25,000 crore, need to disclose granular details of all entities having ownership, economic interest or control without applying materiality cut-offs on a full look-through basis till the level of all natural persons. Foreign governments and government-related entities, FPIs having widespread investor base like public retail funds and certain others like those having Indian-equity or single-group exposure lower than a specified percentage of global AUM are exempt as they are not considered high-risk.
Disclosures need not be made if the existing FPIs crossing the thresholds realign their investments within 90 days. Those breaching the concentration limits in future have 10 trading days’ time to realign, while refraining from purchasing any share in the group for 30 days. If breaching AUM limit, 90 days’ time is given to bring down the investment without triggering disclosures, but till such time the FPIs’ accounts shall be blocked for further equity purchases. If FPIs continue to breach the limits even after the above timelines, the said granular full-look-through disclosures need to be made within 30 days. In case of failure, the FPI’s registration will become invalid and it will need to exit the Indian market by surrendering the registration within 180 days.
To prevent regulatory arbitrage, standard operating procedures for validating compliance shall be framed by DDPs and be made public.
Usha Ganapathy Subramanian is a practising company secretary in Chennai and Ranjith Krishnan is a Thane-based academician.
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