FPIs in breach of August 2023 SEBI circular face uncertainty over licences as September 9 deadline looms

FPIs in breach of August 2023 circular face uncertainty over FPI licenses as September 9 deadline looms

Several large foreign portfolio investors (FPIs) who are in breach of the August 24, 2023, circular issued by the Securities and Exchange Board of India (SEBI) are facing uncertainty ahead of the September 9 deadline for liquidating excess securities. After this date, non-compliant fund operators can lose their FPI licence, said people with direct knowledge of the matter. Large multinational banks that issue participatory notes (P-notes), along with leading global wealth firms managing privately pooled funds, among others, could be adversely affected, the people cited above added.

While the market regulator has proposed easing the norms through a consultation paper released on July 30, FPIs are concerned whether the proposals will be notified before September 9. FPIs want SEBI to either extend the September 9 deadline or notify the July 30 proposals before that date.

The crux of the matter is an August 24, 2023, SEBI circular making it mandatory for certain kinds of FPIs to disclose granular details of ultimate beneficial owners (UBOs). As per the circular, two kinds of FPIs needed to submit UBO information: those (including multiple funds controlled by the same entity/firm) with more than Rs 25,000 crore of assets under management (AUM) in India, and those holding more than 50 percent of their India portfolio in a single corporate group. However, specific exemptions were given to sovereign wealth funds, foreign mutual funds and some others from the Rs 25,000-crore AUM rule.

Anyone not exempted from the rule was required to furnish their UBO information by February 28, 2024, failing which they had 180 days ending September 9 to bring down their AUM below the Rs 25,000-crore mark, or risk losing their licence to operate in India.

The FPIs in question that did not provide the UBO information cited confidentiality clauses prohibiting them from sharing client data with third parties, the people mentioned above said.

An email sent to SEBI remained unanswered.

Market participants say several FPIs have already made applications under Section 43(B) of the  FPIs rules and only two funds have so far managed to get the sought exemption. Both these were Singapore-based India-focused funds started by non-resident Indians who previously worked for leading private equity firms, said the people in the know.

Section 43(B) allows SEBI to provide exemptions to specific FPIs on a case-by-case basis from general compliance requirements. Legal experts point out that there is no timeline specified to decide on these applications.

“In the absence of any statutory timeline provided under the FPI regulations for disposal of applications under 43(B), FPIs are unsure about the fate of their pending applications in view of the fast-approaching deadline. These applications ought to be decided on individual fact patterns and levels of compliance of each FPI, giving sufficient time to the FPIs to liquidate their holdings,” said Tomu Francis, partner at law firm Khaitan & Co. “Further, the SEBI policy on exemption from granular disclosure is still evolving. Parallel streamlining of the policy without stopping the clock on the deadline for liquidation of holdings has inconvenienced FPIs, particularly those which have raised capital from regulated institutional pools.”

July 30 consultation paper

Last month, the market watchdog proposed to ease the FPI concentration norms by making it mandatory only for funds having investors from land-bordering countries (LBC), including China, to disclose such information. Under the August 24 circular, all funds that crossed the Rs 25,000-crore AUM threshold had to disclose UBOs if they were not in the exempted list.

In the July 30 consultation paper, SEBI proposed easing this requirement. Now, any FPI with more than Rs 25,000 crore as AUM and not on the exempt list needs to determine the percentage of clients based in China. If more than 50 percent of the AUM are held by investors from China, the fund will fall under the LBC category, requiring further disclosure. But if Chinese investors form less than 33 percent in the fund, it will be labelled non-LBC, and such funds also needn't make any UBO disclosures. Only funds that have Chinese investors owning financial interest between 33 percent and 50 percent will however still have to disclose the granular details of UBOs.

August 2023 circular not rescinded

As things stand SEBI has not officially issued a fresh circular based on the July 30 paper. This has led to an interpretation that the August 24 circular prevails for now, and in the absence of any exemption/clarification from the regulator, these funds will have to liquidate  holdings in excess of Rs 25,000 crore.

“Considering restrictive disclosure provisions in investor subscription documents, it is contractually challenging—in addition to operationally challenging—for fund managers to obtain the details of each of their beneficial owners. There is a need for SEBI to clarify the context for its concerns and limit the disclosure requirements to address only such concerns,” said Nandini Pathak, head of the investment funds and asset management practice, Bombay Law Chambers..

“The regulatory objective of mandating granular disclosure for FPIs breaching the size criteria was to identify whether or not the FPIs originated from or were controlled by investors from Land Bordering Countries (LBC). Such objective can also be achieved by prescribing a suitable risk-based threshold of disclosure of investors and stakeholders, to categorise an FPI as an LBC or non-LBC entity, rather than mandating disclosure of each and every interest owner in the fund,” SEBI said in the July 30 consultation paper.