The Securities and Exchange Board of India (SEBI) released a consultation paper seeking to impose additional transparency measures on foreign portfolio investors (FPI) who pose a high risk. Among other things, these disclosures are intended to prevent misuse of the FPI route by foreign investors to take over Indian companies.
By highlighting other risks, such as the circumvention of minimum public shareholding (MPS) norms by listed Indian companies, the SEBI paper underscored the need for enhanced disclosures by these limited number of FPI. The regulator noted that in these cases, FPI investments are concentrated in a single entity or group and remain static for a long time.
Promoters of such corporate groups, or other investors acting in concert, may use the FPI route to circumvent regulatory requirements such as maintaining a minimum public shareholding (MPS) through such concentrated investments. As a result, the apparent free float of a listed company may not be the true free float, increasing the risk of price manipulation in such stocks, according to the paper.
Risk-based classification of FPIs
Additionally, the regulator wants FPIs with more than 50% of equity assets under management (AUM) in a single group to make additional disclosures based on their risk profiles.
Currently, SEBI identifies high-risk foreign portfolio companies as managing 2.6 lakh crore worth of assets. There are two criteria that these high-risk foreign portfolio companies must meet – either a 50% concentration level in a single entity or group, or a total investment of more than ₹25,000 crore in Indian equities.
It is necessary to enhance transparency measures to identify high-risk FPI. This should be done on a look-through basis,” SEBI said in its paper.
As part of the enhanced disclosure norms, high-risk foreign institutional investors that have invested more than $25K in Indian equity markets will also be required to do so. As well as those FPIs that have not reached a concentration threshold of 50% in a single entity or group, this will be applicable.
Prior to additional disclosure requirements being triggered, existing and new FPIs that have crossed the 50% concentration threshold will have six months to reduce their exposure below this threshold.
It will be necessary for FPIs to wind down within six months if they fail to comply with these norms
Pension funds and public retail funds with a dispersed investor base are considered moderate-risk, subject to validation by designated depository participants (DDP).
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