MC Explains | What are Sebi FPI norms and how are they linked to the market fall?

Sebi observed that in some instances, promoters were holding more than the stipulated 75 percent by parking their shares with FPIs friendly to them.

A 4 percent fall in the benchmarks Nifty 50 and Sensex over the past one week has got the market chatting about what could be the plausible reasons behind the correction. The most popular one doing the rounds is selling by foreign portfolio investors (FPI) to comply with Sebi's additional disclosure norms.

What are these norms and why has the regulator put them in place? We break it down for you in this edition of MC Explains:

Sebi wants additional disclosures from 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.

FPIs need to give full details of all holders of ownership, economic, and control rights. This will help in identification of ultimate beneficial ownership.

No. Disclosures have to be made by 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.

Sovereign wealth funds, listed companies on certain global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings.

Concentrated investments raise the concern and possibility that promoters of such corporate groups are acting in concert with FPIs. Sebi observed that in some instances, promoters were holding more than the stipulated 75 percent by parking their shares with FPIs friendly to them.

"If this were the case, the apparent free float in a listed company may not be its true free float, increasing the risk of price manipulation in such scrips," Sebi had said.

Back in March 2023, Sebi's first estimate was Rs 2.6 lakh crore. Now, sources say that it is much lower, despite a run-up in the markets over the past one year.

In October 2023, Sebi finalised the standard operating procedure (SOP) for custodians to follow for enhanced disclosures. Existing FPIs, which were in breach of the investment limits as on October 31, 2023, were required to bring down such exposure within 90 calendar days i.e. January 29, 2024. They are required to do this only if they wish to do so.

In case of genuine FPIs, unable to bring down the equity AUM below the prescribed thresholds within the timelines, they shall be required to make the additional disclosures within 30 trading days from 29th January 2024 i.e. by March 11, 2024.

Even thereafter, if they fail to provide any details, they would have a further six months to reduce their holdings.

Over the past one week, Nifty and Sensex fell close to 4 percent and many reports attributed this to FPIs adjusting their portfolios before the January 31 deadline.

Hard to say. It is unlikely that FPIs waited till last minute to adjust portfolios. Foreign investors have sold equities worth Rs 27,830.34 crore over the past one week, much lower than Sebi's initial estimate.

Genuine FPIs would not have any issue in disclosing granular details and would sell stake due to stock-specific reasons rather than to simply comply with the threshold norms.