SEBI new disclosure norms may impact over 200 FPIs

August 28, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

SEBI new disclosure norms may impact over 200 FPIs

Subject : Economy

Section: Capital market

In News: Over 200 foreign portfolio investors will be impacted by the Securities and Exchange Board of India’s new disclosure norms that are set to become operational from November 1 2023.

Key Points:

Securities and Exchange Board of India (Sebi) has mandated additional disclosures for foreign portfolio investors (FPIs) that hold a significant part of their Indian equity holdings in a single corporate group. The new rules were formulated following the Hindenburg-Adani case.
Additional norms related to disclosure of beneficial owners for:
- FPIs holding more than 50 per cent of their Indian equity assets under management (AUM) in a single Indian corporate group or
- Those that individually, or along with their investor group, hold more than ₹25,000 crore worth of Indian stocks.
Exemptions:
- FPIs having a broad based, pooled structure with widespread investor base, ownership interest by government or government related investors, may not pose significant systemic risk and hence have been exempted from the additional disclosure norms.
- Exempt entities include sovereign wealth funds, public retail investment groups, and exchange-traded fund (ETF).

Exchange-Traded Fund (ETF)

An Exchange-Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges, aiming to replicate the performance of a specific index, commodity, or asset class. They are by definition broad based, as their allocation will be similar to the index composition, hence they do not pose systemic risk.

Sovereign wealth fund (SWF)

A sovereign wealth fund (SWF) is a state-owned investment fund that manages a country’s reserves, typically consisting of foreign exchange reserves, surplus funds from trade, and revenue generated from commodities like oil or minerals.
Sovereign wealth funds are designed to preserve and grow a country’s wealth for future generations or to support various economic objectives. SWFs typically invest in a diverse range of assets, including stocks, bonds, real estate, infrastructure projects, and alternative investments.

Public retail investment groups

Public retail investment groups are organizations or companies that provide investment products and services to individual retail investors.
These groups offer a range of investment options that are accessible to the general public and often include various types of financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and more.
Examples of well-known public retail investment groups include brokerage firms, mutual fund companies, and online investment platforms.

Affected FPIs:
- There are 227 FPIs with over 50 per cent of their equity investments in a single stock or group of NSE listed companies.
- FPIs holding over 50 per cent of their equity AUM in a single Indian corporate group have 10 trading days to bring down their holdings.
- Those with over ₹25,000 crore of equity AUM in Indian equities have 90 calendar days to do so.
Disclosures:
- Investors need to make additional disclosures regarding persons having any ownership, economic interest, or control.
- The key aspects to look at would be if these FPIs are set up in FATF-compliant jurisdictions, if the funds are coming through banking channels, and whether these investors have complied with the SEBI requirements and the internal restricted countries lists.
Why did SEBI bring these changes?
- SEBI has apprehensions about circumvention of FDI and listing norms, takeover code, insider trading and round tripping norms.
- Adani Hindenburg case brought to focus areas needing regulatory overhaul. Hindenburg’s research report alleged that Adani engaged in stock manipulation and accounting fraud by using FPI’s as company fronts.
- Certain FPIs have been observed to hold a concentrated portion of their equity portfolio in a single investee company/corporate group.
- Such concentrated investments raise the concern and possibility that promoters of such investee companies/corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements.