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Sebi proposes enhanced disclosure requirements for high-risk FPIs

Mumbai, May 31, 2023

Mandatory disclosures to identify ownership; New disclosures to be unconstrained by PMLA rules, secrecy laws

The Securities and Exchange Board of India (Sebi) has proposed enhanced disclosure requirements for high-risk foreign portfolio investors (FPIs) mandating full identification of ownership, economic interest and control rights.

With the proposed norms, the markets regulator wants to identify ownership details down to the level of natural persons, public retail funds or large listed corporates, without applying any materiality thresholds, equivalent Prevention of Money Laundering Act (PMLA) or secrecy laws applicable in other jurisdictions.

The new norms are targeted at high-risk FPIs that have concentrated single group exposures or significant overall holdings in their India equity investment portfolio.

Under the proposed framework transparency precedes 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,” Sebi has said in the paper.

The regulator has proposed categorisation of FPIs based on risk. Government and related entities such as central banks, 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.

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.

“Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding (MPS),” said Sebi.

However, some threshold relaxation has been proposed for global entities with higher AUMs and for newly-established FPIs for the first six months.

Market watchers said the higher single group exposure norm could impact FPIs with large exposure to the Adani group.

It is proposed that FPIs with 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.

At present, the PMLA norms prescribe identification of beneficial owners (BO) of legal entities based on certain thresholds. 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 PML Rules.

Thus, in many cases Sebi has faced challenges in identifying the ultimate beneficial owners, natural persons with economic interest or even contributors of FPIs, like that in suspicious FPI holdings in Adani group stocks.

Sebi has stated that the mandatory disclosures for high risk FPIs must be unconstrained by any materiality thresholds set by the PMLA Rules and FPI regulations.

Further, the markets regulator has also proposed that existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will also be required to comply with additional granular disclosure requirements within 6 months.

This proposal is to keep a check on investments from FPIs from countries which share their border with India as they can only invest in government-related securities.

According to the data as of March 2023, it is estimated that FPI AUM of around Rs 2.6 trillion, accounting to nearly 6 per cent of the total FPI equity AUM may potentially be identified as high-risk FPIs that meet either of the 50 per cent group concentration or the Rs 25,000 crore fund size thresholds.

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

[The Business Standard]

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