Keeping tabs on ‘high-risk’ FPIs

The Securities and Exchange Board of India (Sebi) has two broad objectives in seeking additional disclosures from what it labels ‘high-risk’ foreign portfolio investors (FPI). The first being circumvention of minimum public float requirements that could undermine price discovery and takeover rules. The second area of concern is investments being routed into Indian equity markets from countries where prior government approval is required, such as those with which India shares a land border. The regulator wants FPIs categorised as high risk to disclose ownership, economic interest and control. These FPIs have over half their holdings in a single corporate group, or have holdings in Indian equities in excess of ₹25,000 crore. Some categories like sovereign funds and exchange-traded funds are exempt from this requirement. Sebi reckons 6% of outstanding FPI equity exposure in India could be affected by the new disclosure rules.

Affected FPIs need a window to trim or diversify their holdings if they choose not to identify the last natural person behind layers of corporate anonymity. Sebi’s interactions with market participants would suggest three months as a reasonable period for an orderly transition to the new disclosure regime. The short timeframe is also made possible by the fact that no FPI needs to unload its entire investment. It merely needs to make additional disclosures at the end of the period. Should an FPI choose to continue with its concentrated holding in a corporate group, it would have to make granular disclosures on a continuing basis.

The regulator’s effort to improve transparency and reduce price manipulation, although welcome, may not be adequate. Disclosure can be avoided by operating just below the thresholds that Sebi is setting out. Corporate control over group companies is open to interpretation. And money laundering laws may be ineffective in identifying beneficial interest in FPIs. The rules will have to be tightened progressively to meet the intended outcomes.