Former Sebi director sees one challenge in Sebi’s disclosure proposal for ‘high-risk’ FPIs

FPIs will be classified as high-risk if they have more than 50 percent of their equity AUM in a single corporate group or if their overall holding in the Indian equity market exceeds Rs 25,000 crore.

Enforcement of the market regulator’s latest proposal for additional disclosures from a group of foreign portfolio investors (FPIs) will pose one challenge, according to a former director and head of legal affairs of the Securities and Exchange Board of India (Sebi).

Depository participants may not have access to the information that Sebi wants them to disclose, according to tweets posted by Sandeep Parekh, former executive director and head of legal affairs and enforcement department, and founder of Finsec Law Advisors.

Also read: Sebi paper asks ‘high risk’ FPIs with concentrated holdings to make more disclosures

In a consultation paper released by Sebi on May 31, it proposed “mandating additional granular disclosures around ownership of, economic interest in, and control of objectively identified high-risk Foreign Portfolio Investors (FPIs) that have either concentrated single group exposures and/ or significant overall holdings in their India equity investment portfolio”.

The FPIs will be classified as high-risk if they have more than 50 percent of their equity Assets Under Management (AUM) in a single corporate group or if their overall holding in the Indian equity market exceeds Rs 25,000 crore, barring exceptions. Sebi has stated that, going by data as of March 31, 2023, such high-risk FPIs handle around 6 percent of total FPI AUM and less than 1 percent of Indian total equity market.

“The proposed amendments would result in disclosure down the rabbit hole to find the final beneficial owner in certain high risk investor categories, as Sebi has defined,” tweeted Parekh. “While the move appears in line with need for higher transparency, it will pose one challenge in terms of enforcement.” The depository participants may not have access to the information that Sebi wants disclosed, he said.

Also read: Sebi looks to plug gaps in PMLA, FII rules with ownership disclosure proposal for FPIs

According to the consultation paper, while primary responsibility of monitoring the concentration of holdings in a single group or in India equity investment portfolio will lie with the FPI, the designated depository participant also could be assigned a significant responsibility.

“The responsibility of monitoring the same (concentration of holdings), informing the FPI regarding exceeding the threshold, if any, rectification of the same and taking further actions would rest with the DDP of the FPI,” the paper stated.

But, as Parekh pointed out, depository participants may not be able to spot who has the economic interest or control over the FPI. “While the depository participant is obliged to get the details of the final person/fund/listed company, there is also an obligation of obtaining economic interest or control. Since these could be done by private agreements, the obligation would really be on the FPI, with no ability of the Depository Participant to go beyond the legal ownership,” he tweeted.