A plan has been established by the Securities and Exchange Board of India (SEBI) jointly with foreign portfolio investors (FPI) custodians, to prevent promoter families and unwanted foreign investors from clandestinely acquiring shares and manipulating the stocks of domestic-listed companies through offshore pooled investment entities operating as FPIs.
The development has been reported by The Economic Times, quoting two individuals familiar with the matter. The introduction of the standard operating procedure (SOP) follows new disclosure regulations that mandate FPIs exceeding specific investment thresholds to disclose the identities of all individuals associated with the entities that have invested in the fund or have control over it.
These disclosure rules will be activated when an FPI’s exposure to Indian equities surpasses Rs 25,000 crore or if it invests 50 per cent of its assets under management in India in companies affiliated with a single corporate group.
These regulations, set to be effective from November 1, are a response to the controversy sparked by the American short-seller Hindenburg, which accused the Adani group of price manipulation and accounting fraud.
However, specific FPI entities will enjoy exemptions from disclosure regulations based on their ownership, structure, and objectives, as long as they meet specific criteria. Overseas insurance and reinsurance entities, as well as pooled investment vehicles, pension funds, and exchange-traded funds, fall into the category of exemptions, subject to certain conditions.
Differing from their Indian counterparts, overseas insurance companies offer products that enable investors to influence the allocation of their funds. In such scenarios, the investor, directing these choices, conceals their identity by registering as an FPI with Sebi through the insurance company.
In a similar vein, pooled vehicles like a protected cell structure (PCC) in Mauritius or a Singapore-based variable capital company (VCC) with multiple sub-funds can be influenced by one or a few investors who indirectly shape their operations, added the ET report.
Understanding the SOP
Given this context, the SOP specifies that foreign insurers and pooled vehicles acting as FPIs will only be exempt from disclosing all their beneficial owners (when investment limits are breached) if they can demonstrate that “the FPI is not maintaining segregated portfolios with a one-to-one correlation with a single investor”, according to the ET report.
It also noted that PCCs or VCCs seeking exemption from total ownership disclosures must ensure that “a common portfolio is maintained across investors” in each cell and sub-fund.
If it is determined that an insurer or pooled vehicle is indeed controlled by an investor, such an FPI will have to disclose the identities of all natural persons behind the structure when investment limits are breached.
Tejas Desai, Partner at EY, specializing in private equity and financial services (tax and regulatory services) told the business daily that the issuance of the SOP will ensure consistent practices and eliminate regulatory arbitrage among designated depository participants (DDPs) facilitating FPI transactions.
“However, I foresee two outcomes of these stricter and more detailed disclosure requirements. Firstly, it is likely to increase the burden on DDPs in terms of information verification, reporting, and document collection. Secondly, while in practice, the enhanced disclosure norms are expected to affect only a small number of high-risk FPIs, as India continues to attract more foreign capital, it may be perceived as having stringent market entry requirements compared to some other jurisdictions,” Desai was quoted as saying by the ET report.
Therefore, custodians will now be tasked with confirming whether exempted FPIs maintain a common pool and are not under the control of a single investor. They must also obtain certified or attested documents from regulators confirming that an FPI functions as a regulated insurance scheme or pension fund. The SOP explicitly mandates that custodians obtain these documents and not solely rely on FPI declarations.
Sebi’s initial plan
Sebi initially released a consultation paper requesting additional disclosures from FPIs with concentrated exposures to a single corporate group or significant allocations to India. In such cases, the market regulator sought comprehensive ownership, economic interest, or control data on FPIs on a look-through basis, extending to all natural persons.
For current FPIs exceeding the investment limit by October 31, 2023, they are required to decrease their exposure within 90 days, which must be completed by January 29, 2024, added the ET report.
Failure to comply will necessitate the disclosure of all beneficial owners’ identities by March 11, 2024, or they risk potential closure. Additionally, FPIs surpassing the investment limit after November 1 must swiftly reduce their exposures within a 10-day timeframe.
