Adani-Hindenburg effect: SEBI wants ‘high risk’ FPIs with concentrated holdings to make additional disclosures

• Markets regulator Securities and Exchange Board of India (SEBI) has released a consultation paper seeking additional disclosures from certain ‘high-risk’ foreign portfolio investors.
  
• These disclosures are aimed at guarding against the misuse of the FPI route for takeover of Indian companies by ‘high-risk’ FPIs, among other things.
  
• SEBI has identified that high-risk FPIs have ₹2.6 lakh crore of assets under management as of March 31, 2023.
  

Markets regulator Securities and Exchange Board of India (SEBI) has released a consultation paper that seeks to impose additional transparency measures on certain ‘high risk’ foreign portfolio investors (FPIs). These disclosures are aimed at guarding against the misuse of the FPI route for takeover of Indian companies by such FPIs, among other things.

The SEBI paper underlined the need for enhanced disclosures by these limited number of FPIs by highlighting other risks such as the circumvention of minimum public shareholding (MPS) norms by listed Indian companies – in these cases, the regulator observed that the FPI investments are concentrated in a single entity or group and are static over a period of time.

“Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding (MPS). 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,” the paper said.

Classifying FPIs on the basis of risk

The regulator has also sought to classify FPIs based on the risk profile as high, moderate and low risk. It also wants FPIs with more than 50% of equity assets under management (AUM) in a single group to make additional disclosures.

SEBI has identified that high-risk FPIs have ₹2.6 lakh crore of assets under management as of March 31, 2023. These high-risk FPIs meet either of the two criteria – 50% concentration threshold in a single entity or group, or have a total investment of over ₹25,000 crore in Indian equities.

"Enhanced transparency measures are needed for identifying high-risk FPIs. This should be done on a look-through basis,” the SEBI paper said.

Additionally, high-risk FPIs with a total investment of over ₹25,000 crore in the Indian equity markets will also be required to comply with the enhanced disclosure norms. This will also be applicable to those FPIs that have not crossed the 50% concentration threshold in a single entity or group.

Existing and new FPIs that have crossed the 50% concentration threshold will be given six months’ time to bring down their exposure below this threshold before the additional disclosure requirements are triggered.

If FPIs fail to comply with these norms, their FPI registration will be rendered invalid and they will be required to wind down within six months.

Sovereign wealth funds, central banks and other government entities are considered as low risk, while pension funds and public retail funds with a dispersed investor base are considered moderate-risk, subject to validation by designated depository participants (DDP).

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