SEBI's FPI rule revamp aims for transparency, faces enforcement hurdles

In a bid to enhance transparency and regulatory oversight, SEBI (Securities and Exchange Board of India) has proposed significant amendments to the regulations governing FPIs (Foreign Portfolio Investors). While these changes are aimed at shedding light on the intricate web of FPI ownership and interests, concerns have arisen regarding the potential for private agreements to obscure crucial details.

SEBI's proposed amendments seek to mandate additional granular disclosures from FPIs, categorised based on risk levels falling into high, moderate, and low categories. The objective is to uncover high-risk investments and ensure that FPIs provide detailed information regarding their ownership, economic interests, and control. Notably, SEBI's approach is to delve deep into the FPI structure, down to the level of natural persons, public retail funds, or large listed corporates, without applying materiality thresholds. This approach is regardless of any equivalent rules in other jurisdictions of their domicile, including tax havens.

The FPIs encompass a diverse group of institutional and individual investors from foreign countries who collectively invest in financial assets such as stocks, bonds, and other securities in countries outside their own. This category includes Foreign Institutional Investors (FIIs), comprising large institutional entities like mutual funds, pension funds, and insurance companies, as well as individual foreign investors and foreign investment funds.

FPIs are crucial participants in global financial markets, injecting liquidity, diversifying investment portfolios, and facilitating the efficient allocation of capital across borders. They are subject to regulatory oversight in the host countries where they invest, adhering to varying rules and regulations specific to each jurisdiction,

So, what triggers these mandatory disclosures? According to SEBI's proposal, FPIs that have 50 per cent of their investments concentrated within a single corporate group or company, or those with an overall holding exceeding Rs 25000 crore in the Indian market, will be required to provide this additional information. The primary reasons behind these proposed changes are to guard against possible violations of public shareholding norms and to prevent misuse of the FPI route to circumvent legal requirements.

In a board meeting held on June 28, 2023, SEBI approved these key proposals, marking a significant step toward greater transparency in the Indian securities market. The amendments aim to align FPI regulations with the eligibility criteria specified in the Prevention of Money Laundering (PML) Rules, which involve reduced thresholds.

Under these amendments, certain entities such as government and government-related investors, pension funds, public retail funds, certain listed Exchange Traded Funds (ETFs), corporate entities, and verified pooled investment vehicles meeting specific conditions will be exempted from making the additional disclosures. This exemption is intended to balance the need for transparency with practicality.

While the move toward higher transparency is commendable, it does pose certain enforcement challenges. Private agreements between FPIs and other parties could potentially obscure full details from the depository participants responsible for collecting FPI information. This raises concerns about the effectiveness of these disclosures in truly revealing the complex ownership structures that can exist within the FPI landscape.

The significance of these amendments extends beyond their potential enforcement challenges. They come in the wake of a January report by US-based short-seller Hindenburg Research, which alleged that certain FPIs' shareholding in Adani Group entities violated SEBI's minimum 25 per cent public-shareholding norm for listed companies. SEBI has denied any connection between its proposed amendments and this specific case.

However, a report by The Ken reveals that by way of its structure these new regulations, however, have shifted the focus to a wide variety of other large corporations and the FPIs that invest in them, including OP Jindal, GMR, Hinduja, Aditya Birla, Bajaj, Murugappa, Tata, Larsen & Toubro, and Bharti Enterprises. Thus, the financial markets will also have to be looking to see if these changes provide the necessary openness while also adequately addressing the issues of enforcement.FPI