Such FPIs will have to make additional disclosures around the ownership of, economic interest in, and control of such funds.
Sebi is also trying to prevent overseas entities from indirectly controlling Indian firms through a chain of shell companies.
The regulator’s paper has proposed to categorise FPIs into high, moderate and low risk.
* Moderate risk: Pension or public retail funds with a diverse investor base
Who is impacted
High-risk FPIs will have to provide complete details of the operational structure if they hold more than 50 per cent in a single group.
“Sebi has been mindful of the need to walk the tightrope between the need to ensure trust and transparency and the need to ensure ease of doing business in India. Accordingly, additional disclosures are proposed to be obtained only from the FPIs categorised as high risk, which also fulfil other criteria as specified,” said Suresh Swamy, partner, Price Waterhouse & Co.
FPIs with an exposure of more than 50 per cent to a single group or with assets of over Rs 25,000 crore will be tagged as ‘high risk’ and will be required to provide additional information such as full identification of their ownership, economic interests, and control rights. They will have to follow the new norms within six months, failing which the FPI will have to bring down its AUM below the threshold within a time frame. Moreover, failure to provide these disclosures will lead to the invalidation of the FPI registration.
FPI circumvention?
“Through the proposed changes, SEBI intends to maintain free float in the public shareholding of listed companies and keep the prices of such shares subject to free market forces instead of manipulation,” said Raj Bhalla, partner at law firm MV Kini.
If this were the case, the apparent free float in a listed company may not be its true free float, increasing the risk of price manipulation in such scrips, noted Sebi. In order to ensure that there is no such circumvention of MPS or other related regulations, Sebi thinks it is necessary to obtain granular information from FPIs. If FPIs are made to reveal details about the beneficiary owners/ultimate beneficiaries, then it becomes easier to investigate if these entities have any links to the promoter group.
Sebi is worried that FPIs may be used as a front to conceal ownership of Indian shares by entities in such countries
“SEBI is apprehensive, that investors from land bordering countries could be using the FPI route instead of the mandated government route, since FPIs are exempt from PN3 requirements. In certain instances, SEBI has observed that while an FPI itself may be situated out of a non–land bordering country, the investors in such high-risk FPIs may be based out of land–bordering countries. Thus, in this backdrop, SEBI aims to prevent misuse of PN3 requirements by entities based out of land bordering countries,” said Raj Bhalla, Partner at law firm MV Kini.
SEBI also fears that FPIs could potentially be misused for circumventing the requirements under the PMLA by avoiding the disclosure of the true identity of the beneficial owner. “Therefore, additional KYC disclosures are required to be implemented. Since this will involve deeper disclosures, to remove difficulties instead of proposing the additional KYC requirements for all FPIs, to maintain balance, SEBI is proposing to categorise the FPIs in 3 categories,” said Rohit Jain, managing partner, Singhania & Co.
FPIs discouraged?
The new proposal will be difficult to implement
“While the Depository Participant is obliged to get the details of the final person/fund/listed company, there is also an obligation of obtaining economic interest or control. Since these could be done by private agreements, the obligation would really be on the FPI, with no ability of the Depository Participant to go beyond the legal ownership,” said Parekh.
“Investors will feel jittery about the information being disclosed about their structures, especially where different jurisdictions are used to deploy funds. FPIs that could fall within the realm of ‘high-risk FPIs’ would surely have a relook at their investors and flow of monies, to either be able to disclose or wind up or cease to be a high-risk FPI,” said Manendra Singh, partner at Economic Laws Practice.
“There have been instances where FPIs have eyed a particular company or a group for long-term exposure. Thus, we may see some structuring of FPI investments into India, pursuant to these recommendations. Sebi may still question FPIs even after structuring their investment to bring it within the concentration limit, if Sebi thinks that the FPIs are deliberately trying to keep their investment into respective Indian company or a group close to the concentration limit,” said Dhaval Jariwala, partner, PNDJ & Associates. (Read more here)
“Momentum seen in FPI flows in the past two months could slow down in the near term, but normalise once compliances are in place. These measures are right steps to improve governance standards and ownership quality in Indian Companies. Would also help improve investor confidence in the market and avert situations seen in the first quarter of the year,” said Rajesh Cheruvu, Managing Director and Chief Investment Officer, LGT Wealth India.
“The relaxation to the existing FPIs to cross the 50 per cent group concentration up to a period of 6 months and the opportunity to existing FIPs to wound down their investments will enable high-risk FPIs to yet again evade from rendering data of all entities with any ownership, economic interest or control rights on a full look through basis up to the level of all natural persons and Public Retail Funds or large public listed entities. While the proposal put forward by SEBI is the right step to ensure transparency and to protect the interest of the investors, however, at the same time the categorization and relaxation embedded under the proposals continue to put the investment of the investors under risk identified by SEBI,” said Siddharth Joshi, Senior Associate, SKV Law Offices.