ADDITIONAL DISCLOSURE FRAMEWORK FOR LARGE FPIs
Alpha Partners
Recognised Indian corporate commercial law firm based in Delhi NCR and Dubai
Introduction
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In a move aimed at streamlining regulations, the Securities and Exchange Board of India (“SEBI”) has released a consultation paper[1] proposing significant changes to the disclosure requirements for Foreign Portfolio Investors (“FPI”). The proposal, which seeks public comments until August 20, 2024, is designed to enhance the ease of doing business for FPIs while addressing concerns about investments originating from Land Bordering Countries (“LBC”).
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Background
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The current disclosure framework, established by SEBI's August 24, 2023 circular[2], mandates granular disclosures for FPIs meeting the following specific criteria:
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?? Concentration criterion: FPIs holding more than 50% of their Indian equity Assets Under Management (“AUM”) in a single Indian corporate group.
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?? Size criterion: FPIs individually or with their investor group holding more than INR 25,000 crore of equity AUM in Indian markets.
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These requirements were implemented to guard against potential circumvention of circumvention of Minimum Public Shareholding norms, requirements under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 and Press Note 3, SEBI (Foreign Portfolio Investors) Regulations, 2019.
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Challenges Faced
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During the implementation phase, SEBI engaged with industry participants and identified several challenges, particularly for large, diversified funds that breached the size criterion. These funds faced difficulties in providing granular details of every entity holding ownership, economic interest, or control, given their extensive and diverse investor bases.
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Proposal
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To address these challenges while maintaining regulatory objectives, SEBI is proposing a risk-based approach to disclosures. SEBI has proposed the following risk-based thresholds for identification and categorization of an FPI as an LBC or non- LBC entity:
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?? FPIs would be categorized as LBC if entities from LBCs own, control, or hold economic interest in more than 50% of the FPI's AUM and further granular disclosures shall not be required.
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?? FPIs would be categorized as non-LBC if entities from non-LBCs own, control, or hold economic interest in more than 67% of the FPI's AUM and further granular disclosures shall not be required. This higher threshold ensures that any LBC influence, if present, would be below 33% and thus less significant.
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?? If neither of the above thresholds is met, the FPI would be required to provide granular details of all entities with ownership, control, or economic interest in the FPI. The FPI would then be categorized based on the disclosures made by the FPI considering the country or nationality of entities owning, controlling or holding economic interest in majority (i.e. more than 50%) of AUM of the FPI.
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?? For entities meeting exemption criteria specified in the August 2023 circular, further granular disclosures shall not be required and the country or nationality of the intermediate entity would be considered for categorization purposes.
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?? In line with the 'trust, but verify' principle, Designated Depository Participants (DDPs) would be required to verify actual disclosures, not just rely on declarations from FPIs.
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It is pertinent to note that the framework as discussed above has been proposed only for dealing with breach of the size criteria. No change is being proposed in the extant framework for dealing with breach of the concentration criteria.
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The proposed risk-based approach aims to strike a balance between regulatory oversight and operational practicality for FPIs. By setting thresholds for LBC and non-LBC categorization, SEBI seeks to streamline the disclosure process while still achieving the objective of identifying FPIs with significant LBC influence.
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Conclusion
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This proposed modification to the FPI disclosure framework represents SEBI's ongoing efforts to refine its regulatory approach in response to market feedback and practical challenges. By adopting a risk-based methodology, SEBI aims to maintain effective oversight of foreign investments while improving the ease of doing business for FPIs in the Indian market. The outcome of this consultation process could significantly impact how large FPIs operate in India, potentially influencing foreign investment flows.