Sebi proposes enhanced disclosure requirements for high-risk FPIs

The Securities and Exchange Board of India (Sebi) has proposed stricter disclosure norms for certain foreign portfolio investors (FPIs) to bring in more transparency and trust against the backdrop of the Adani-Hindenburg Research saga.

Under the new norms, FPIs with an exposure of more than 50 per cent to a single group or with assets of over Rs 25,000 crore will be tagged as ‘high risk’ and will be required to provide additional information such as full identification of their ownership, economic interests, and control rights.

A failure to provide these disclosures will lead to invalidation of the FPI registration.

The move is to address concerns that certain promoters may be cornering additional shares to bypass the minimum public shareholding (MPS) norms.

“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 MPS,” Sebi said in a consultation paper on Wednesday.

With the proposed norms, the markets regulator wants to identify granular ownership details on a full look-through basis down to the level of natural persons or public retail funds or large public-listed corporates.

These would be done without applying any materiality thresholds prescribed in the Prevention of Money Laundering Act (PMLA) or secrecy laws applicable in other jurisdictions.

Legal experts said if approved, these could make the FPI disclosure regime in India one of the strictest globally.

Sebi said the new rules gave precedence to transparency over simpler norms.

“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,” said the regulator.

The stricter norms, however, will not be applicable to all FPIs.

Sebi has proposed the categorisation of FPIs based on risk.

Government and related entities such as central banks and sovereign wealth funds have been categorised as 'low risk', while pension funds and public retail funds are placed under 'moderate risk'.

All other FPIs have been called 'high risk'.

“Sebi has been mindful of the need to walk the tightrope between the need to ensure trust and transparency and the need to ensure ease of doing business in India.

"Accordingly, additional disclosures are proposed to be obtained only from the FPIs categorised as high risk, which also fulfil other criteria as specified,” said Suresh Swamy, partner, Price Waterhouse & Co.

Sebi estimates that FPI assets under custody (AUC) of around Rs 2.6 trillion, or 6 per cent of the total FPI AUC, may be identified as ‘high risk’.

The recent report submitted by the Supreme Court-appointed panel underscored the challenges faced by Sebi while investigating possible violations of the MPS norms at Adani group companies due to the amendment introduced in the PMLA.

In 2018, the provision of dealing with an ‘opaque structure’ and requiring an FPI to disclose every ultimate natural person at the end of the chain was done away with.

This was done on the premise that the declaration of beneficial-owner flows under PMLA rules was sufficient for regulatory purposes.

The SC-constituted committee had observed that the repeal of the provision on ‘opaque structure’ could make it a perpetual search for natural owners of FPI contributors in the Adani matter with no destination.

At present, PMLA norms prescribe the identification of beneficial owners (BO) of legal entities based on certain thresholds such as 10 per cent or 25 per cent.

However, no natural person is identified as the BO of FPIs as each investor entity in the FPI is generally found to be below the threshold prescribed under the PMLA rules.

“The BO concept is well recognised and the opaque structures created to circumvent the regulations should be discouraged. Restricting the additional disclosure requirements only to a limited number of identified high-risk FPIs is appropriate,” said Punit Shah, partner, Dhruva Advisors.

The FPIs holding higher than 50 per cent in a single corporate group will be provided with a six-month period to bring down their exposure before additional disclosures are mandated.

A similar time period will be provided for newly established FPIs.

Further, the markets regulator has proposed that existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will be required to comply with the additional disclosure requirements within six months.

This proposal is to keep a check on investments from FPIs based in countries that share their border with India, as they can only invest through the government route.

The regulator has sought public comments on the proposal by June 20.