Sebi mulls mandating additional disclosure for high-risk FPIs

To bring greater transparency in the Indian capital markets, Sebi (Securities and Exchange Board of India) on Wednesday came out with a proposal mandating enhanced disclosures from high-risk Foreign Portfolio Investors (FPIs) that have concentrated holding in a single company or a group firm.

These proposals are aimed at preventing possible circumvention of minimum public shareholding (MPS) requirements and potential misuse of the FPI route to guard against the inherent risks of opportunistic takeover of Indian companies, Sebi said in its consultation paper.

The proposal has its genesis in the Adani stocks issue where Sebi could not identify the beneficial owners of some foreign portfolio investments in Adani stocks since the existing regulations are lax in identifying the true owners of many investments.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, under the proposal, the regulator said that high-risk FPIs with concentrated single group equity exposures or significant equity holdings will be mandated to provide additional granular disclosure. They would be required to identify all entities with any ownership, economic interest and control rights.

 "Such FPIs shall be required to provide granular data of all entities with any ownership, economic interest, or control rights on a full look–through basis, up to the level of all natural persons and/or public retail funds or large public listed entities," it said.

Sebi noted that some FPIs have been observed to concentrate a substantial portion of their equity portfolio in a single investee company/company group.

"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. 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 said.

Also, the regulator has suggested categorising FPIs based on risk. While government and related entities like central banks and sovereign wealth funds have been placed under the low-risk category, pension funds and public retail funds have been clubbed in the category of moderate risk. Further, all other FPIs have been put in the high-risk category.

It has been proposed that high-risk FPIs, holding more than 50 per cent of their equity Asset Under Management (AUM) in a single corporate group, would be required to comply with the requirements for additional disclosures. Further, any material change in the same also needs to be communicated by the FPIs to their designated depository participants within seven working days of such a change.

However, the regulator has suggested certain threshold relaxation for global entities with higher AUMs as well as for newly-established FPIs for the first six months.

Existing high-risk FPIs that have more than 50 per cent concentration threshold in a single corporate group will be provided a window of six months to bring down such exposure.

Sebi suggested that failure to provide such additional granular disclosures wherever required will render the FPI registration invalid. Such FPIs would be required to wind down within six months.

Separately, it is proposed that existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore should also be required to comply with additional granular disclosure requirements within 6 months.

"On the surface, any enhanced disclosure requirements may appear to detract from ease-of-doing investments. However, there can be no sustained capital formation without transparency and trust," Sebi noted.

A Sebi data showed that FPI assets under management (AUM) of only about Rs 2.6 lakh crore -- around six per cent of the total FPI equity AUM and less than one per cent of India total equity market capitalisation -- may potentially be identified as high-risk FPIs.

Geojit Financial Services' Vijayakumar said that the proposal can go a long way in bringing transparency in high-risk FPI. The proposed guidelines are welcome. Stocks where FPI investments are properly disclosed have nothing to worry about.

Also, the regulator said that proposed additional disclosure requirements will not impact low-risk and moderate-risk FPIs in any manner.

Sebi has sought public comments till June 20 on the proposal.