Explained | Why is the markets regulator asking for more disclosures from foreign portfolio investors? Premium

SEBI is seeking additional disclosures from Foreign Portfolio Investors to circumvent

The story so far: On May 31, markets regulator the Securities and Exchange Board of India (SEBI) floated a consultation paper that proposed additional disclosures from Foreign Portfolio Investors (FPIs). The objective is two-fold, firstly, to guard against possible circumvention of the requirement pertaining to Minimum Public Shareholding (MPS) and secondly, to prevent the misuse of the FPI route to circumvent the requirements listed in the Press Note 3 (updated April 2020). The regulator is seeking comments on the same until June 20.  

As per the regulator, the objective is to “enhance trust in the Indian securities markets by mandating additional granular disclosures around ownership of, economic interest in, and control of objectively identified high-risk FPIs” that have either concentrated exposures to a single group and/or significant holdings by means of equity investments in India.  

The development assumes particular significance considering what Financial Times reported on May 19— that the markets regulator had “drawn a blank” in its investigation into 13 offshore entities it considered suspicious. Further, as per observations in the report, the regulator’s own investigation was made tougher by a change in the legislative policy under the FPI Regulations, 2014. Based on the recommendation of a Working Group, in 2018, the provision dealing with ‘opaque’ structure and disclosing “every ultimate natural person at the end of the chain of every owner of economic interest in the FPI” was done away with.  

The proposed regulations would thus try and identify tangible ownership and curtail incidences of multiple routes being used to acquire ownership in a company. This would help avert regulatory requirements, and more importantly, keep up with the minimum public shareholding norms. For perspective, it requires that public shareholding, or the shares held by the public for a listed entity, must be at least 25% to continue being listed. 

The markets regulator acknowledges that on the surface, any enhanced disclosure requirements may appear to detract from ease-of-doing investments, adding, “However, there can be no sustained capital formation without transparency and trust.”  

The two broad issues that prompted floating of the proposed regulation in the consultation paper are: potential misuse of the FPI route for circumventing Press Note 3 stipulations and concentrated group investments by foreign portfolio investors endeavouring to bypass regulatory requirements (such as that for minimum public shareholding).  

It has been observed that FPIs direct a substantial portion of their equity portfolio in the country to a single investee company or a company group. In some instances, the investments — as against the regular buying and selling in a market — have been observed to be static and maintained for a long time. SEBI observes, “Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding.” This would entail that the suggested free float, or the shares available in the open market for public trading without restrictions, , may not actually be correct. The practice may also invite price manipulation in such scrips.