SEBI Proposes Enhanced Disclosure Requirements for High-risk FPIs

SEBI, the regulatory body for securities and exchanges in India, has put forward stricter disclosure regulations for specific foreign portfolio investors (FPIs) to enhance transparency and build trust, especially after the Adani-Hindenburg Research incident. The objective is to tackle worries related to concentrated investments and the potential avoidance of regulatory requirements. In this article, you can learn more about this development from the perspective of the IAS exam.

SEBI’s Proposed Disclosure Requirements for FPIs

Tighter Rules for High-Risk FPIs:

• Classification of High-Risk FPIs: Foreign portfolio investors (FPIs) with a concentration of over 50% in a single group or possessing assets valued at more than Rs 25,000 crore will fall under the ‘high-risk’ category. 
  • These FPIs will be required to furnish additional details regarding their ownership, economic interests, and control rights. Failure to comply with these disclosure requirements may result in the revocation of their FPI registration.
• Curbing MPS Norms Evasion: The newly proposed regulations aim to prevent promoters from utilizing FPI channels to bypass the minimum public shareholding (MPS) norms. 
  • The concerns arise from concentrated investments, as they raise suspicions that regulatory obligations, such as maintaining MPS, could be circumvented.

Detailed Ownership Information and Enhanced Transparency:

• In-depth Ownership Details: Sebi aims to collect detailed ownership information of FPIs, including natural persons, public retail funds, and large public-listed companies. 
  • No specific thresholds defined in the Prevention of Money Laundering Act (PMLA) or secrecy laws of other jurisdictions will be applied.
• Stricter FPI Disclosure Standards: If approved, the proposed rules could make India’s FPI disclosure standards one of the strictest worldwide. Sebi emphasizes the importance of transparency and trust for sustainable capital formation.

Risk Categorization and Applicability:

• FPI Categorization: Sebi suggests categorizing FPIs based on risk levels. Government entities, central banks, and sovereign wealth funds will be classified as ‘low risk’, while pension funds and public retail funds will be considered ‘moderate risk’. All other FPIs will fall under the ‘high risk’ category.
• Targeting High-Risk FPIs: Additional disclosures will only be required from FPIs categorized as ‘high risk’ that fulfil specific criteria. Sebi aims to strike a balance between transparency and ease of doing business.

Implementation and Compliance:

• Projected Number of High-Risk FPIs: Sebi’s estimation suggests that approximately Rs 2.6 trillion, which accounts for roughly 6% of the total FPI assets under custody (AUC), may fall into the ‘high-risk’ category according to the proposed regulations.
• Transition Period and Adherence: FPIs with exposure surpassing 50% in a single corporate group will be granted a six-month period to decrease their exposure before being obligated to provide additional disclosures. 
  • Similarly, newly established FPIs will also have the same transition period. Existing high-risk FPIs, with equity market holdings exceeding Rs 25,000 crore, will need to comply with the supplementary disclosure requirements within six months.

Conclusion:

• Sebi’s proposal for stricter disclosure norms for FPIs aims to enhance transparency, prevent potential regulatory evasion, and foster trust in the Indian market. 
• If implemented, the proposed rules will provide detailed ownership information and establish a rigorous framework for FPIs, positioning India as a leader in transparency and accountability.

SEBI Proposes Enhanced Disclosure Requirements for High-risk FPIs:- Download PDF Here