FPI disclosure norms deadline extended: Why is SEBI seeking investor data?

Subject: Economy

Section: Capital Market

Context:

Foreign portfolio investors (FPIs), who are mandated to liquidate their holdings as per the Securities and Exchange Board of India’s (Sebi) January-end deadline, will get seven months more to provide additional disclosures.

More on news:

In August last year, the markets regulator had asked FPIs, who were holding more than 50 per cent of their equity AUM in a single corporate group or with an overall holding in Indian equity markets of over Rs 25,000 crore, to disclose granular details of all entities holding any ownership, economic interest, or exercising control in the FPI.
The norms were announced to prevent the possible round-tripping by certain promoters using the FPI route.

Why has SEBI asked FPIs to provide additional disclosures?

In its August circular, Sebi said certain FPIs are holding a concentrated portion of their equity portfolio in a single investee company/ corporate group.
Such concentrated investments could be used to circumvent regulatory requirements such as that of disclosures under Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations) or maintaining Minimum Public Shareholding (MPS) in the listed company.

What additional details are required from FPIs?

Sebi said granular details of all entities holding any ownership, economic interest, or exercising control in the FPI will have to be provided by FPIs.
While economic interest means returns from the investments made by the FPI, ownership interest means ownership of shares or capital of the entity or entitlement to derive profits from the activity of the entity.

Are all FPIs required to provide additional disclosures?

Sebi has said FPIs holding more than 50 per cent of their Indian equity assets under management (AUM) in a single Indian corporate group or holding over Rs 25,000 crore of equity AUM in the Indian markets are required to disclose details.

Which FPIs are exempted from making additional disclosure?

FPIs who are sovereign wealth funds (SWFs), listed companies on certain global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings, are exempted from making enhanced disclosures.

What is Press Note 3?

During the Covid-19 pandemic, the government amended the foreign direct investment (FDI) policy through a Press Note 3 (2020) on April 17, 2020.
The amendments were said to have been made to check opportunistic takeovers/acquisitions of stressed Indian companies at a cheaper valuation.

About Foreign Portfolio Investments(FPI) and Foreign Direct Investment(FDI):

Foreign Portfolio Investments(FPI)

Foreign portfolio investment (FPI) refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.
This type of investment is at times viewed less favorably than direct investment because portfolio investments can be sold off quickly and are at times seen as short-term attempts to make money, rather than a long-term investment in the economy.
Portfolio investments typically have a shorter time frame for investment return than direct investments.

Foreign Direct Investment(FDI)

FDI is the process whereby residents of one country (the home country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country).
It is different from Foreign Portfolio Investment where the foreign entity merely buys stocks and bonds of a company. FPI does not provide the investor with control over the business.
Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise.
FDI has three components,, equity capital, reinvested earnings and intra-company loans.
Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
Reinvested earnings comprise the direct investors’ share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.