On July 30, 2024, SEBI issued a Consultation Paper (Paper) seeking comments from the public on the proposal to improve the ease of doing business regarding the additional disclosure framework for large Foreign Portfolio Investors (FPIs). It outlines significant regulatory adjustments aimed at balancing compliance with operational flexibility.
Background:
In 2023, SEBI observed that some FPIs had a significant portion of their equity investments concentrated in a single investee company or corporate group. This concentration raised concerns that promoters of these companies or other investors working together might be using the FPI route to bypass regulatory requirements, such as those related to disclosures under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, or the mandate to maintain minimum public shareholding in publicly listed companies.
Recognizing these risks, SEBI on August 24, 2023, introduced a circular (August Circular) that required FPIs meeting specific criteria i.e. either holding more than 50% of their Indian equity Assets Under Management (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), to disclose granular details on a look-through basis of all entities with ownership, economic interest, or control over the FPI.
During the implementation of the August Circular, SEBI encountered that large non-exempt FPIs expressed difficulties in providing detailed disclosures due to their size and the diversification of their investor bases. This prompted SEBI to consider a more manageable disclosure model that aligns with the ease of doing business.
Proposal:
The primary aim of the proposal is to modify the existing disclosure requirements for FPIs with AUM exceeding INR 25,000 crores. The current framework mandates granular disclosures (such as registration no., name of the entity/persons having direct ownership, country/nationality, type of right held in the FPI, PAN details etc.) of all investors on a look-through basis to determine if an FPI is domiciled in a Land Bordering Country (LBC). The proposed change seeks to ease the burden of compliance by allowing disclosures based on a majority threshold rather than requiring detailed information on every investor. As the regulatory objective of mandating the disclosure of granular details was to identify whether or not the FPIs originated from / were controlled by investors from a LBC, which can be achieved by implementing a risk-based threshold to categorise an FPI as LBC or non-LBC entity, rather than mandating disclosure of each and every interest owner in the fund.
SEBI has now proposed the following ‘risk-based criteria’ to categorize FPIs into LBC and non-LBC entities:
- LBC Categorization: If more than 50% of the AUM of the FPI is controlled/owned/holds economic interest by entities from LBCs, the FPI shall be categorised as LBC and further granular disclosures shall not be required.
- Non-LBC Categorization: If more than 67% of the AUM is controlled/owned/holds economic interest by entities from non-LBCs, the FPI shall be categorised as non-LBC and further granular disclosures shall not be required. This higher threshold ensures that any influence from LBC entities remains below 33%.
- If neither threshold is met, granular details need to be disclosed of all entities owing/controlling/ holding economic interest in the FPI. However, the FPI will be categorized based on the disclosures, considering the country/nationality of entities holding a majority (over 50%) of the AUM. For the purpose of identifying and categorizing as LBC or non-LBC, the holdings of the exempted entities under the August Circular, will be considered based on their country/nationality.
The proposed thresholds in the Paper only address breaches of the Size criteria, without interfering with the existing framework for the concentration criteria.
SEBI, in line with the ‘trust, but verify’ principle also proposed that the identification of an FPI as LBC or non-LBC will be based on verified disclosures by the Designated Depository Participants (DDPs), and not on mere declarations.
The proposed changes reflect a shift toward a more flexible regulatory environment for FPIs, aiming to attract foreign capital while ensuring adherence to domestic regulations. By reducing the disclosure burden, SEBI seeks to improve the ease of doing business in India, potentially leading to increased foreign investment. The proposal acknowledges the operational challenges faced by large FPIs and aims to create a framework that effectively monitors compliance while facilitating business operations. Emphasizing a risk-based approach aligns with global best practices, promoting transparency without imposing excessive regulatory burdens on investors.
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