The Securities and Exchange Board of India (SEBI) is on a mission to amplify transparency and ease of doing business in the marketplace. Aiming to tighten the reins on high-risk Foreign Portfolio Investors (FPIs), SEBI has recently unveiled a consultation paper requesting these investors to offer more in-depth ownership, economic interest, and control disclosures. This strategy surfaces in the aftermath of SEBI informing the Supreme Court about its unsuccessful attempts at identifying beneficial owners of certain FPIs involved with the Adani group, following allegations from the Hindenburg report.
In this context, SEBI has identified those FPIs as high-risk which hold substantial overall holdings or single group exposures in their Indian Equity Investment Portfolio. According to the paper, FPIs with over 50% stake in a single stock or group conglomerate must disclose all ownership details within half a year, or they may risk losing their registration. This article examines SEBI’s move and its potential success in discovering possible collusions between FPIs and company promoters.
Background: Boosting Investor Protection and Transparency
SEBI seeks to enhance investor protection and foster transparency within the Indian securities ecosystem to promote sustained capital formation. Consequently, it necessitates auxiliary disclosures from specific high-risk FPIs.
Identifying Key Issues
SEBI has underlined its concerns regarding certain FPIs that hold a considerable portion of their equity portfolio in a single investee company or company group or have maintained static investments for extended periods. There are suspicions that these FPIs might be colluding with promoters to circumvent the regulatory requirement of Minimum Public Shareholding (MPS) of 25% as per rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (SCRR). Any violation of the MPS in a company raises concerns about the accuracy of the company’s reported free float.
The Implications of Beneficial Ownership
Under the Prevention of Money Laundering Act, 2002 (PMLA), a beneficial owner is defined as an individual who ultimately owns or controls a client of a reporting entity or conducts transactions on behalf of a person. As per the recent amendments, the threshold for beneficial ownership in PMLA has been reduced from 25% to 10%.
SEBI’s Proposed Solution for MPS Circumvention
To enhance market transparency while maintaining ease of business, SEBI has proposed to categorize existing FPIs into three risk categories. High-risk FPIs that have over 50% of their assets under management in only one corporate group will need to fully identify all holders of ownership, economic, and control rights. Moreover, FPIs with total holdings in Indian equity markets exceeding Rs. 25,000 Cr., will have to meet additional detailed disclosure requirements within six months.
An Analysis of SEBI’s Initiative
SEBI’s efforts to identify beneficial owners have often been thwarted by thresholds under the PMLA Act and its rules. However, by categorizing FPIs into risk categories, SEBI aims to prevent market disruptions. Nonetheless, the implementation of the new rules and requirements is where the true challenge lies for the regulator. While the move is a step in the right direction, it ultimately depends on how these guidelines are executed.
