Mauritius FPIs named in Hindenburg report challenge SEBI norms as September 9 deadline looms

The funds have sought SAT intervention to order Sebi to dispose their exemption applications expeditiously;

Two Mauritius-based foreign portfolio investors (FPIs), who were mentioned in the January 2023 report on the Adani Group by short-seller Hindenburg Research, have petitioned the Securities Appellate Tribunal, seeking urgent relief from complying with Sebi's new foreign investor norms, court filings accessed by Moneycontrol showed. Both entities filed the case and paid the fee to SAT on August 19, filings showed.

The funds alleged Sebi's directions asking them to comply with certain conditions that did not apply to other FPIs have unfairly disadvantaged their investors, according to the petition, which is set for a hearing next week, people with direct knowledge of the matter said.

The two funds – LTS Investment Funds and Lotus Global Investment – have asked SAT to order Sebi to rule on their exemption application expeditiously and have also sought protection from the Sebi diktat asking funds not in compliance with new FPI concentration norms to unwind their portfolios by September 9. They have asked SAT to direct Sebi to give time until March 2025 to meet these norms.

LTS said it has a global investment portfolio of around $4 billion while Lotus said the value of its portfolio worldwide was $900 million. However, the size of their India portfolio could not be ascertained. Both of them are in breach of a specific condition requiring FPIs to not have more than 50 percent of their India investments in a single corporate group.

Moneycontrol had reported on August 23 that several FPIs were facing issues due to the FPI concentration norms and as many as 43B applications had been filed with Sebi. Under the rules, FPIs who are in breach of the concentration norms need to liquidate their excess holdings by September 9.

The two funds – LTS Investment and Lotus Investment – have argued that Sebi has not processed their 43B exemption request even though they had filed these in March. They have also alleged while their application for exemption was pending, Sebi went ahead and changed the Standard Operating Procedure (SOP) for implementation of the norms on May 22,2024 by removing references to pooled vehicles from Mauritius from the exemption list. To get more clarity, the lawyers of the funds met with Sebi officials in June 2024 where they were told that the funds need to comply with certain additional rules to get the exemption.

“The additional conditions requested by the Respondent (Sebi) at the meeting on June 25,2024 are not specified in the SOP for a PIV (pooled investment vehicle) validation, thereby leading the appellant to believe that all the conditions that were transparently stipulated in the SOP for PIV were met by appellant (LTS) and that appellant would receive the validation as PIV,” said LTS in its petition. “The Inordinate delay in deciding the Appellant’s exemption application is therefore arbitrary in nature.”

According to the court filings of Lotus, the lawyers of the fund met Sebi officials on June 25 where the issue was discussed. Lotus was informed by Sebi that they need to fulfill additional conditions including reducing concertation of investments in a single Indian corporate group below 50 percent of its India assets. Sebi also asked the fund to provide additional granular details regarding ultimate beneficial owners having economic interest and statements from independent third parties showing that the fund was in compliance with international balancing requirement under PIV norms.

“The appellant would be subject to additional conditions which are not applicable to other participants operating under the same FPI framework. This would be prejudicial to the appellant and would place the Appellant’s investors at a significant disadvantage compared to investors in other FPI funds,” said Lotus.  The fund also added it was willing to work towards reducing the concentration of its India equity portfolio. However, Sebi has not passed any appropriate orders in this regard, it said.

Hindenburg had mentioned these funds in January 2023 report

In its report, the US based shortseller had alleged that five FPIs including Lotus and LTS were formed by the same entity, based out of the same address, and with multiple overlapping nominee directors. It also alleged LTS held 97.9 percent of its India assets in Adani Group companies.

Hindenburg could not ascertain the ownership of Lotus in Adani Group since their shareholding in the group companies fell below 1 percent. Both the funds no longer feature among Adani Group shareholders implying either they have exited the investment, or their stakes are below 1 percent.

The custodian for Lotus told the FPI that PIVs can be exempt from the Sebi rules only for FPIs hailing from countries where laws require mandatory pari-passu rights to investors. The custodian also added that the Mauritius regulatory documents submitted by Lotus did not explicitly mention these rights, hence exemption could not be taken up, court filings showed. Following this response from custodian, the fund approached Sebi for clarity.

Pari-passu is a legal terminology which means that "on equal footing". In the current context, pari passu means, no specific investor within the fund has special powers or rights over the fund. This is to ensure that no investor has superior rights within an FPI which could lead to a situation where the investor with superior rights drives the investment decisions.