Sebi firm on FPI ownership norms as deadline looms
Mumbai, Jan 23, 2024
Synopsis
The capital markets regulator, in its discussion paper on the topic, had estimated the assets under management (AUM) of "high-risk" foreign funds that must make additional disclosure at ₹2.6 lakh crore as on March 31, 2023.
The Securities and Exchange Board of India (Sebi) is set on imposing tightened ultimate beneficial ownership norms for overseas investors with effect from February 1 despite pressure from foreign banks and a section of offshore fund managers to ease the rules ahead of the deadline, said a person with direct knowledge of the matter. According to unofficial estimates, there could be a sell-off in Indian stocks in the range of ₹1.5 lakh crore to ₹2 lakh crore over the next six months by funds unable to comply with the norms.
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The capital markets regulator, in its discussion paper on the topic, had estimated the assets under management (AUM) of "high-risk" foreign funds that must make additional disclosure at ₹2.6 lakh crore as on March 31, 2023.
The new regulations require such investment vehicles to provide granular details of all entities holding any ownership, economic interest, or exercising control. According to Sebi, foreign portfolio investors (FPIs) holding more than 50% of their Indian equity AUM in a single Indian corporate group and those holding more than ₹25,000 crore of equity AUM in the Indian markets must adhere to these norms. The rules were introduced in August 2023 in the wake of allegations of opacity in the ownership structure of overseas entities that were shareholders in Adani Group companies.
While Sebi has allowed a grace period for such funds to adhere to the rules, these entities will not be able to make fresh purchases of Indian stocks thereafter and can only trade on domestic stock exchanges to cut their holdings. Such FPIs must liquidate their holdings and surrender their Sebi registration within 180 calendar days.
"FPIs that are not exempt from disclosure have till February to disclose details of their investors," said the person cited above. "If they are unable or unwilling to disclose details, they have another six months to bring down their positions. There is no immediate requirement on anyone to offload any shares."
Sebi didn't respond to queries.
FPI selling?
As the deadline for complying with the norms nears, executives at foreign banks, lawyers and consultants said overseas investors not in a position to disclose ultimate beneficiaries are already selling or gearing up to offload their holdings in India. "The granular disclosure requirements has indeed triggered off a flurry of activities amongst FPIs as the timeline to adhere to the requirements draws closer," said Siddharth Shah, partner, Khaitan & Co.
He said FPIs that wouldn't have been able to meet these standards have already begun paring their holdings in India.
"Relatively speaking, the challenges are higher for fund managers who have higher non-institutional capital, where applying the granular disclosure standards is becoming a challenge," Shah said.
So far, FPIs that have not been able to disclose the granular details sought by Sebi are mostly from jurisdictions such as Panama, Bermuda, the British Virgin Islands and the Cayman Islands.
Select exemptions
Sebi has allowed exemptions to select foreign fund categories that it deems are "genuine," said the person cited above.
"In genuine cases Sebi has powers under 43B of the FPI regulations to grant relaxation for non-compliance due to factors beyond the control of the entity or there is a violation which is technical in nature," said the person.
The regulator has already given leeway to overseas investor categories such as foreign government funds, offshore public retail funds and pension funds, which it considers as 'low-risk' and 'moderate-risk' FPIs.
In addition to the current set of exemptions, the regulator is in the process of evaluating more categories of FPIs that may not disclose these granular details.
"Sebi doesn't want 'type 1' errors where we allow bad things to happen in the market," said the person. "At the same time, it doesn't want 'type 2' errors where heavy-handed framework of rules obstruct legitimate capital formation."
Non-compliance will be more likely among FPIs holding more than 50% of their Indian equity AUM in a single domestic corporate group. Consultants advising foreign investors said there are several global funds including newly registered ones that have put money in one or two stocks in India and are likely to be impacted by the new rules.
“Such funds would fall into the criteria of FPIs holding 50% or more of their equity assets under AUM in a single Indian corporate group,” said a senior official with a leading consultancy firm. “Though their Indian portfolio value is a very minuscule percentage compared to their overall global AUM, they are required to provide details of each investor of their global fund which becomes challenging and perhaps not the intention of captioned guidelines.”
Entry barriers
Officials at foreign banks, lawyers and consultants said these norms could hurt foreign funds flows into the country’s stocks and have sought the relaxation of some of the regulations. “It would only be fair to state that notwithstanding how noble the end objective of these disclosure obligations be, these definitely have raised the entry barriers for the Indian markets,” said Shah. “It could make accessing the Indian market more expensive and could prove to be a bump in the free flow of the overseas capital in the longer run. Some rationalisation and possibly a widened access for FPIs would make India a compelling asset class for overseas investors in spite of these hurdles.”
[The Economic Times]
