Mandating Additional Disclosures By Foreign Portfolio Investors (FPIs) That Fulfil Certain Objective Criteria

The Securities and Exchange Board of India (SEBI) has issued new regulations aimed at addressing concerns regarding Foreign Portfolio Investors (FPIs) holding concentrated portions of their equity portfolios in single investee companies or corporate groups.[1] Such concentrated investments raise concerns about potential misuse of the FPI route to circumvent regulatory requirements, such as disclosure obligations and maintaining minimum public shareholding.

To mitigate these risks and ensure the orderly functioning of Indian securities markets, the government issued Press Note 3 (PN3) in 2020, requiring entities from border-sharing countries to invest in India only through the government route. While PN3 does not apply to FPI investments, concerns remain that entities with significant Indian equity portfolios could disrupt the market using the FPI route.

Additionally, SEBI recognized the challenge of identifying Beneficial Owners (BOs) of FPIs, as no natural person often meets the ownership threshold specified in the Prevention of Money Laundering Rules. To address these issues, SEBI introduced regulatory amendments, including new regulations (22(6) and 22(7)) in the SEBI (FPI) Regulations, 2019.

Under these regulations, FPIs meeting specific criteria must provide detailed information on entities holding ownership, economic interest, or control in the FPI, down to the level of all natural persons, without any threshold. The criteria include FPIs with more than 50% of their Indian equity Assets under Management (AUM) in a single Indian corporate group and FPIs with over INR 25,000 crore of equity AUM in Indian markets.

Exemptions are granted to FPIs with widespread investor bases, ownership interest by governments or government-related investors, and other specific circumstances. The details of compliance mechanisms and exemptions will be outlined in a Standard Operating Procedure (SOP) to ensure consistent practices across industry players.

Entities collectively holding over INR 25,000 crore of equity AUM in Indian markets are exempt from additional disclosures if they consist of FPIs meeting the exemption criteria mentioned earlier. Timelines for compliance and consequences of non-compliance are also specified, including account freezes and regulatory actions.

The new regulations emphasize transparency and accountability, allowing SEBI to monitor FPI activities more closely and protect the interests of investors while promoting the development and regulation of the securities market. These regulations will come into effect on November 1, 2023, and depositories and stock exchanges will implement the necessary mechanisms to enforce compliance.

[1] https://www.sebi.gov.in/legal/circulars/aug-2023/mandating-additional-disclosures-by-foreign-portfolio-investors-fpis-that-fulfil-certain-objective-criteria_75886.html