Background
The Securities and Exchange and Board of India (“SEBI”) observed in 2023 that certain foreign portfolio investors (“FPIs”) held a concentrated portion of their equity portfolio in a single investee company or corporate group. Such concentrated investments raised concerns that promoters of such investee companies or corporate groups, or other investors acting in concert, could be using the FPI route to circumvent regulatory requirements such as that of disclosures under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or maintaining minimum public shareholding in public listed companies.
SEBI, being cognizant of these risks, had accordingly revised the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”) on August 10, 2023, and imposed additional disclosure requirements on a look-through basis to identify if the FPIs originated from or were controlled by investors from land bordering country (“LBC”). This was applicable for FPIs fulfilling the following criteria:
- They hold more than 50% of their Indian equity AUM in a single Indian corporate group (“concentration criteria”); or
- They individually, or along with their investor group (in terms of Regulation 22(3) of the FPI Regulations, 2019), hold more than INR 25,000 Crores of equity AUM in the Indian markets (“size criteria”).
However, during the implementation of the amended FPI Regulations, SEBI, after due deliberations with industry experts, realized that the imposition of additional disclosures posed operational challenges for certain FPIs with more than INR 25,000 crores in AUM, where the investors were broad based and diversified.
Proposed Change
SEBI has, through its consultation paper issued on July 30, 2024, proposed certain changes to relieve FPIs from providing comprehensive details and instead proposed to adopt a suitable risk-based threshold of disclosure of investors and stakeholders to categorize an FPI as LBC or non-LBC entity, rather than mandating disclosure of each and every interest owner in the fund. The risk-based threshold would not always require granular details as set out below. The proposed changes are summarized below:
- If the entities owning/controlling/holding an economic interest in more than 50% of the AUM of the FPI are from LBC, the FPI shall be categorized as LBC and further granular disclosures shall not be required.
- If the entities owning/controlling/holding an economic interest in more than 67% of the AUM of the FPI are from non-LBC, the FPI shall be categorized as non-LBC and further granular disclosures shall not be required.
- If the above-mentioned thresholds are not met, the FPI shall be required to disclose granular details of all entities owning/controlling/holding economic interest in the FPI. However, categorization of the FPI shall be made on the basis of disclosures made by the FPI considering the country/nationality of entities owning/ controlling/ holding an economic interest in the majority (i.e. more than 50%) of AUM of the FPI.
CONCLUSION
Through the consultation paper, SEBI has invited public comments till August 20, 2024. Therefore, while we await the final changes in FPI Regulations, the proposal is nevertheless a welcome move as it would help to ease up operational hassles for FPIs, which is in line with the objective of the Central Government to promote in ease in doing business in India.
Author- Ankit Bhasin
Co-Author- Akshita Mittal
