SEBI gets strict on beneficial owners hiding behind FPIs

Subject : Economics

Concept :

Market regulator SEBI is now going behind the corporate veil of the foreign portfolio investors in the aftermath of the allegations that have emerged against Adani Group.
In India, it has been noticed that in a large number of cases, the foreign portfolio investors (FPIs) are just the registered vehicles, but the ultimate beneficial owners (UBOs) of their positions are hidden.
The Securities and Exchange Board of India (Sebi) has asked Designated Depository Participants (DDPs) operating within Indian banks to update the beneficial ownership details of the foreign portfolio investors on-boarded as their clients within September 30.

Background

Besides levelling charges of brazen stock manipulation and accounting frauds, the Hindenburg report stated that many of the funds investing in the listed Adani companies’ universe have concealed their ultimate beneficial ownership with nominee directors.

Beneficial ownership

A beneficial owner is a person who enjoys the benefits of ownership though the property’s title is in another name.
Publicly traded securities are often registered in the name of a broker for safety and convenience.
Wealthy individuals often list their assets under trust while they remain the beneficial owner.
Beneficial ownership is distinguished from legal ownership.
In most cases, the legal and beneficial owners are one and the same, but there are some cases, legitimate and sometimes less legitimate, where the beneficial owner of a property may wish to remain anonymous.
When a corporation or other legal entity opens a bank account, the bank must identify the beneficial owners of that entity. This is intended to prevent money laundering and tax evasion.

Foreign Portfolio Investors

Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign investors.
It does not provide the investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.
Examples of FPIs include stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts (ADRs), and Global Depositary Receipts (GDRs).
FPI is part of a country’s capital account and is shown on its Balance of Payments (BOP).
The BOP measures the amount of money flowing from one country to other countries over one monetary year.
FPI is often referred to as “hot money” because of its tendency to flee at the first signs of trouble in an economy. FPI is more liquid, volatile and therefore riskier than FDI.