SEBI Mandates Additional Disclosures By Foreign Portfolio Investors

The circular highlights the observation that certain FPIs maintain a concentrated portion of their equity portfolio within a single investee company or corporate group. This practice raises red flags regarding the possibility of such investee companies' promoters or other investors working in concert exploiting the FPI route to evade regulatory requirements. These requirements include the Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations), and the stipulation for maintaining Minimum Public Shareholding (MPS) in listed companies.

The backdrop of these concerns, the circular further states, aligns with the Government of India's (GoI) Press Note 3 (PN3), dated April 17, 2020, which mandates that entities from countries sharing a land border with India or where the Beneficial Owner (BO) of an investment is situated, invest only through the Government route. Although PN3 does not directly apply to FPI investments, there are apprehensions that entities with substantial Indian equity portfolios might misuse the FPI route, potentially disrupting the orderly functioning of Indian securities markets.

Furthermore, the circular states tat in addition, identifying the Beneficial Owners (BOs) of FPIs has proven to be intricate. While the thresholds for BO identification are specified in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLR), it has been observed that several FPIs do not have a single natural person identified as the BO based on economic or ownership interest. This scenario arises because individual investor entities within the FPI often fall below the PMLR-prescribed threshold. Nonetheless, the same individual might collectively hold a substantial aggregate economic interest in the FPI through various investment entities, each individually below the PMLR threshold.

Regulatory Amendments

To address these concerns, SEBI has introduced Regulations 22 (6) and 22(7) into the SEBI (FPI) Regulations, 2019, through the SEBI (Foreign Portfolio Investors) (Second Amendment) Regulations, 2023, effective from August 10, 2023.

Under Regulations 22 (6) and 22 (7), FPIs meeting specific criteria are required to provide detailed information about entities holding any ownership, economic interest, or control in the FPI. This information should extend to all natural persons, without any threshold, and should be submitted to respective Depository Participants (DDPs) in a prescribed format, as per the Standard Operating Procedure (SOP) to be developed by DDPs/Custodians in consultation with SEBI.

Criteria for Disclosures

FPIs meeting certain criteria must submit granular details of ownership, economic interest, and control in the FPI, up to the level of natural persons. The criteria include:

1. FPIs holding over 50% of their Indian equity Assets Under Management (AUM) in a single Indian corporate group.
2. FPIs holding, individually or with their investor group, more than INR 25,000 crore of equity AUM in the Indian markets.

Certain FPIs are exempt from these disclosures, including Government and Government-related investors, Public Retail Funds (PRFs), Exchange Traded Funds with less than 50% exposure to Indian equity securities, and entities listed on specified exchanges of permissible jurisdictions.

FPIs unable to liquidate excess investments due to statutory restrictions, newly registered FPIs within the first 90 days of settling their first trade, and FPIs winding down investments with intimation to their DDPs also enjoy exemptions.

SEBI's circular emphasizes the importance of transparent and orderly market conduct while ensuring that genuine concerns and circumstances of FPIs are duly considered. The Standard Operating Procedure (SOP) is anticipated to maintain industry-wide consistency and curb regulatory arbitrage.

FPIs have been urged to comply with these new guidelines, with a 180-day window given for those winding down investments to rectify their holdings to avoid regulatory action.

Timelines and Compliance: FPIs have specific timelines to realign their investments if they exceed prescribed thresholds. Non-compliance will render their FPI registration invalid, and they’ll need to exit the Indian securities market.

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