10 things you should know about why SEBI wants FPIs to disclose full ownership details

Sebi releases consultation paper on FPI holdings.

The Securities and Exchange Board of India (SEBI) today floated a consultation paper on a proposal to get certain foreign portfolio investors (FPIs) to make full disclosure about their ownership structures and the ultimate beneficiaries. Let’s dive into what the proposals are and why SEBI is pushing for them.

What is SEBI’s consultation paper about?

SEBI is seeking additional disclosures from foreign portfolio investors (FPIs) to prevent companies from manipulating the rules on minimum public shareholding, and also to prevent overseas entities from indirectly controlling Indian companies through a chain or web of shell firms.

Are the proposed rules applicable to all FPIs?

No, they are applicable only to FPIs that meet certain criteria―FPIs whose 50 percent of equity assets under management are invested in a single Indian corporate group, or FPIs that have invested over Rs 25,000 crore in the Indian stock market.

How were the minimum public shareholding norms violated?

SEBI observed that in some instances, promoters were holding more than the stipulated 75 percent by parking their shares with FPIs friendly to them. This reduced the free float in the stocks and made them susceptible to price manipulation. If the FPIs are forced to reveal details about the beneficiary owners/ultimate beneficiaries, then it becomes easier for SEBI to find out if these entities have links to the promoter group.

Who is a beneficial owner?

A beneficial owner (BO) refers to an individual or entity that enjoys the benefits of ownership of an asset or property, even if the legal title or formal ownership is held by someone else. In other words, the BO is the one who ultimately benefits from the asset, such as receiving income, exercising control, or making decisions regarding its use or disposition.

How is it different from the ultimate beneficial owner?

An ultimate beneficial owner (UBO) specifically refers to the natural person who has the highest level of ownership or control over an entity. The UBO is the individual who ultimately, directly or indirectly, owns or controls a significant portion of the entity's shares and voting rights, or has the ability to influence its operations and decision-making.

What are the current regulations relating to identifying BOs and UBOs?

The Prevention of Money Laundering (PML) Rules specify the thresholds based on ownership, or entitlement to capital or profits (i.e., economic interest), for identifying the BO of legal entities. They are 10 percent for companies and trusts, and 15 percent for partnerships. It also specifies that BO includes those natural persons who exercise ultimate effective control over a legal person or arrangement.

What do the current SEBI rules on disclosure of ownership details by FPIs say?

SEBI follows the same thresholds set under the PML rules. Designated Depository Participants (DDPs) or Custodians are required to identify all the ultimate owners of FPIs by looking through the ownership chain and applying a threshold to determine who qualifies as an owner.
The threshold is first applied at the level of the FPI itself. If any entity exceeds this threshold, the owners of that entity are identified by looking through its ownership chain, applying the same threshold criteria. This process continues until all the individual owners at the end of the ownership chain are identified.

Are the rules being followed by FPIs?

According to SEBI, they are being followed in letter, but not in spirit. Beneficiary owners avoid detection by keeping their stakes below the threshold specified under the PML and SEBI FII rules. So, while BO details based on control or fund ownership are generally disclosed, often no natural person is identified as the BO of FPIs based on economic interest. But it is quite likely that the same natural person holds a significant aggregate economic interest in the FPI through multiple investment entities, each of which is individually below the threshold for identification as a BO.

How is SEBI looking to plug this loophole?

SEBI has proposed that high-risk FPIs that meet the two criteria mentioned above—50 percent holding in a single corporate entity or Rs 25,000 crore plus of India equity assets—need to give full details of all holders of ownership, economic, and control rights.

How does SEBI identify an FPI to be high-risk?

SEBI has classified government and government-related entities such as central banks, sovereign wealth funds, etc. as low-risk FPIs since the ownership, economic and control interest in such entities is known due to predominant ownership by the government of the respective country. Pension Funds or Public Retail Funds have been defined as moderate-risk FPIs. All FPIs that do not fulfil the above criteria are classified as high-risk FPIs.

Can FPIs dodge the new rules by staying below the threshold limits under PML rules?

No. That is because SEBI has proposed that identification of BOs should be done by looking past the legal entities right down to the level of natural persons, public retail funds, or large listed corporates, “without applying any materiality thresholds, and notwithstanding any equivalent PMLA rules” or secrecy laws that may be applicable in other jurisdictions of their domicile (including tax havens, if any).