SEBI relaxes FPI disclosure norms

  • March 16, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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SEBI relaxes FPI disclosure norms

Subject: Economy

Section: Capital market and money market

Exemption for Foreign Portfolio Investors (FPIs):

  • Sebi has exempted certain Foreign Portfolio Investors (FPIs) from the additional disclosure framework.
  • This relief applies to FPIs that have more than 50% of their Indian assets under management (AUM) within a single corporate group.
  • The exemption is provided for FPIs with concentrated holdings in a listed company with no identified promoter, subject to certain conditions.

Relaxation of Timelines for Disclosure:

  • Sebi has approved a proposal to relax the timelines for the disclosure of material changes by FPIs.
  • Currently, FPIs are required to disclose material changes within seven working days.
  • The new provision allows a minimum period of 180 days or the end of the registration block, whichever is later, for the disposal of securities in case of adverse changes in compliance status or non-submission of documents for reclassification.

Disposal of Securities:

  • If securities held by an FPI are not disposed of after the specified 180-day period, an additional 180 days will be provided.
  • However, a financial disincentive of 5% of the sale proceeds will be credited by the custodian to Sebi’s Investor Protection and Education Fund.
  • Securities remaining unsold after the additional period will be deemed to have been compulsorily written off by the FPI.

Launch of Beta Version of T+0 Settlement:

  • Sebi has approved the launch of a beta version of the optional T+0 settlement for a limited set of 25 scrips and with a limited set of brokers.

Changes in Public/Rights Issue of Equity Shares:

  • Sebi has decided to eliminate the requirement of a 1% security deposit in public/rights issues of equity shares.
  • Additionally, flexibility will be provided to extend the offer closing date due to force majeure events.

Foreign Portfolio Investors (FPIs): An Overview

Foreign Portfolio Investment (FPI) refers to investments made by foreign entities in financial assets such as stocks, bonds, mutual funds, and other securities of a country’s financial markets.

Unlike Foreign Direct Investment (FDI), FPI does not involve acquiring a substantial ownership stake or control in the invested entity. Instead, it represents a passive investment approach to earn returns from capital appreciation and dividends.

Characteristics of FPI:

  1. Passive Ownership: FPI involves holding financial assets without seeking to actively control or influence the management of the invested companies. Investors rely on the performance of the assets for their returns.
  2. Liquidity and Volatility: FPI investments are relatively liquid, meaning they can be easily bought or sold in the financial markets. However, this liquidity also makes FPIs more susceptible to market volatility and changes in investor sentiment.
  3. Diversification: FPI allows investors to diversify their portfolios across different countries, industries, and asset classes. This diversification helps spread risk and potentially improve returns.
  4. Financial Instruments: FPIs can invest in a variety of financial instruments, including but not limited to:
    • Stocks: Ownership shares of publicly traded companies.
    • Bonds: Debt securities issued by governments or corporations.
    • Mutual Funds: Pooled investment funds managed by professionals, investing in a diversified portfolio of assets.
    • Exchange-Traded Funds (ETFs): Funds that are traded on stock exchanges and represent a basket of securities.
    • American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs): Certificates representing ownership of shares in foreign companies traded on stock exchanges outside their home country.

Role in the Economy:

  • FPIs play a crucial role in providing liquidity to financial markets, helping to facilitate price discovery and efficient allocation of capital.
  • They contribute to the overall depth and breadth of financial markets, making them more attractive to domestic investors and businesses.
  • FPIs can bring in foreign currency, which can contribute to a country’s foreign exchange reserves and support the stability of its currency.

“Hot Money” and Risk Considerations:

  • FPIs are often termed as “hot money” due to their tendency to move swiftly in and out of markets based on economic conditions, interest rates, geopolitical events, and other factors.
  • This rapid movement can lead to increased market volatility and potential risks for domestic markets, especially during times of economic uncertainty or market stress.

SEBI’s FPI Disclosure Norms:

Additional Disclosures:

  • Criteria for Disclosure: SEBI requires Foreign Portfolio Investors (FPIs) holding more than 50% of their Indian equity Assets Under Management (AUM) in a single Indian corporate group or having over Rs 25,000 crore of equity AUM in the Indian markets to provide additional details.
  • Purpose of Disclosure: The aim is to enhance transparency and oversight, particularly for FPIs with concentrated holdings that could potentially impact the market.

Alignment with PN3 Concerns:

  • Press Note 3 (PN3) Context: While PN3 does not directly apply to FPI investments, SEBI is cautious about potential misuse of the FPI route.
  • Importance of Additional Disclosures: SEBI views obtaining detailed information from FPIs as crucial to address concerns of market disruption, regulatory circumvention, and ensure the protection of Indian securities markets.

SEBI’s move to require additional disclosures from FPIs reflects a proactive approach to enhance transparency, mitigate market risks, and align foreign portfolio investments with regulatory objectives in India’s securities markets.

Press Note 3 (2020)

Context:

  • Press Note 3 (2020) was introduced by the Union government during the Covid-19 pandemic as an amendment to the Foreign Direct Investment (FDI) policy.

Objective:

  • The primary aim was to address concerns related to opportunistic takeovers and acquisitions of stressed Indian companies at potentially undervalued prices.

Key Provisions:

  1. Government Route Mandate:
    • Entities from countries sharing a land border with India or where the beneficial owner of an investment is situated or is a citizen of such countries were required to follow the Government Route for investments.
  2. Investment Routes:
    • Government Route: This route involves obtaining official approval from regulatory bodies for foreign investments. It is typically used for sensitive sectors or investments of strategic importance.
    • Automatic Route: Under this route, investments can be made without prior approval, particularly in sectors where foreign participation is encouraged, and the investment does not pose significant regulatory concerns.
  3. Change in Beneficial Ownership:
    • The Press Note also specified that any transfer of ownership, whether existing or future Foreign Direct Investment (FDI), directly or indirectly, resulting in the beneficial ownership falling within the purview of the amended policy, would require government approval.
  4. Enforcement:
    • Press Note 3 (2020) was enforced through the Foreign Exchange Management (Non-Debt Instruments) Amendment Rules 2020.
  5. Current Status:
    • As of January 2024, Press Note 3 (2020) remains enforceable, indicating that the government’s regulations regarding FDI from border-sharing countries are still in effect.

Implications and Significance:

  • Safeguarding Indian Interests: The introduction of Press Note 3 aimed to protect Indian companies, particularly those in distress during the pandemic, from potentially unfavorable takeovers.
  • Enhanced Regulatory Oversight: By mandating the Government Route for investments from specific countries, the government sought to ensure closer scrutiny and approval for investments in critical sectors.
  • Preventing Undervalued Acquisitions: The requirement for government approval in cases of change in beneficial ownership aimed to prevent acquisitions or transfers at prices considered undervalued or detrimental to Indian interests.

Investor Protection and Education Fund (IEPF)

The Investor Protection and Education Fund (IEPF) is a fund established by the Securities and Exchange Board of India (SEBI) for the protection of the interests of investors in the Indian financial market. It serves as a mechanism to safeguard the rights of investors and educate them about various aspects of investing.

Purpose of IEPF:

The primary objectives of the Investor Protection and Education Fund are as follows:

  • Investor Protection: The fund aims to protect the interests of investors, particularly small investors, in securities markets. It provides a mechanism for compensating investors who have suffered losses due to defaults or fraudulent activities by companies or market intermediaries.
  • Education and Awareness: Another key objective is to educate investors about their rights and responsibilities. The fund supports initiatives and programs that promote investor education, financial literacy, and awareness about market risks.

Sources of Funding:

The IEPF is funded through various sources, including:

  • Unclaimed Dividends: One of the primary sources of funding for the IEPF is unclaimed dividends. When dividends declared by companies remain unclaimed by shareholders for a specified period, they are transferred to the IEPF.
  • Unclaimed Shares: Similarly, shares that are unclaimed by investors for a certain period, such as in cases of demat accounts with no activity, are transferred to the IEPF.
  • Refunds from SEBI: Any fines, penalties, or disgorgements collected by SEBI from market participants may also contribute to the IEPF.
econmomy SEBI relaxes FPI disclosure norms