In view of the recent reports being rolled out in respect of a large Indian conglomerate having investments in few foreign portfolio investors (FPIs) and with the vision of protecting the interest of investors to ensure transparency on disclosures, Securities and Exchange Board of India (Sebi) in its recently concluded board meeting has made some key announcements for FPIs to bring in much-required clarity for foreign investors.
Additional disclosures by FPIs
Firstly, on disclosures, Sebi has now made it mandatory for certain classes of FPIs to make additional granular disclosures regarding ownership, economic interest, and controlling rights on a full look–through basis. FPIs holding more than 50% of their asset under management (AUM) in a single corporate group or FPIs that individually, or along with their investor group, hold more than Rs 250,000 million in the Indian markets would be required to comply with the new requirements.
As a carve-out, certain entities such as governments and government-related investors, pension funds and public retail funds, certain listed ETFs, corporate entities and verified pooled investment vehicles meeting certain conditions are being exempted from making these disclosures.
This will certainly be a breather for those sections of FPIs which are either government-related, regulated or in a listed space wherein the chance of disguising proprietary funds is remote.
The above step is to curb the use of FPI structures which impact the free float of securities and create an opportunity for price fluctuation. To get maximum exposure and ensure that the concentration limits prescribed under the regulations are not breached, investments are made via multiple vehicles wherein the shareholding is kept below the specified thresholds.
The proposed framework seems to adopt a look-through approach, thereby addressing issues pertaining to indirect investments by a few domestic entities via the FPI route. Sebi will now be able to identify the actual beneficial owners and restrict misuse of FPI vehicles for making investments exceeding the stipulated limits, which is against the spirit of the prescribed regulations.
Impact
The regulator now expects the designated depositary participants (DDPs) while reporting for FPIs, to disregard the materiality thresholds or any other secrecy laws that may be applicable in the FPI’s home jurisdiction and report about the beneficial owners beyond the legal entities to the ultimate natural person who is the actual owner of the funds. There are prevailing secrecy laws in many jurisdictions which do not permit disclosures of the identities of individual end investors.
However, this change has created additional onus for the FPIs to do housekeeping of the additional documentation requirements as the threshold is reduced, making it more stringent for the FPIs to carry out portfolio investment activities in the Indian capital market.
Our views
Sebi is mindful of the disclosure requirements of the FPIs and has been, time and again, instrumental in alerting the FPIs through operational guidelines, circulars and instructions to provide details of the senior managing officials (SMOs) of the ultimate parent entity of all existing FPIs, who have earlier declared no ultimate beneficial owner (UBO) from an ownership or control basis, to lift up the corporate veil and identify the real beneficiary behind the FPIs.
The regulator has taken the right approach to ensure that not only the investors’ confidence is kept intact but also the said action creates more transparency and enhances the trust of investors, while considering India as an investment jurisdiction over other countries.
Expected Clarity
The proposal, when rolled out in the form of regulations, will clarify on whether the amendment would be applicable prospectively and existing FPIs will get a window for either making disclosures or going back to the drawing board to realign the shareholding pattern.
Alignment of threshold limits for identification of BO
Secondly, the much-awaited change in the alignment of the eligibility criteria, prescribed under the FPI regulations with respect to the threshold requirements for identification of beneficial ownership, is in line with the prevention of money laundering (PML) rules.
Earlier this year, on 7 March, the Government amended the PML rules and notified the Prevention of Money-laundering (Maintenance of Records) Amendment Rules, 2023 (Amendment Rules). The Amendment Rules inter alia amended the ownership threshold for the identification of BO under the PML Rules to (i) 10% for companies and trusts; and (ii) 15% for partnership firms and unincorporated association or body of individuals. The FPI regulations are now amended on similar lines.
Concluding comments
Overall, the regulator is making efforts to combat the hindrances that are hitting the offshore investor’s sentiments and creating hurdles for the growing Indian market which is on the way to becoming the third largest economy soon as envisaged by the Indian prime minister in his latest visit to the United States.
Post Supreme Court’s intervention on this matter, Sebi is leaving no stone unturned to fill the lacunae on the identification of the end natural person in the FPI. This will certainly enhance transparency and boost confidence for genuine investors and rule out the possibility of one individual getting control in multiple vehicles via opaque structures.
To maintain the momentum of foreign cashflows, Sebi must keep its motto alive of promulgating ease of doing business to foreign investors. The regulators need to ensure that the steps of enhanced compliances and disclosures do not kill the optimistic mood of the institutional investors, especially at a time when India is being considered the most preferred destination in the coming years, compared to the other large market economies that are facing threats to financial sustainability and assured returns.
The record inflows by the FPI community in June 2023 for Rs 470,000 million plus infusion in the equity segment is a testimony of the outperforming Indian economy backed by all-time high GST collections, promising fiscal deficit and Q4 GDP numbers.
Growing at the current pace, India will continue to be among the top investment jurisdictions for both domestic and offshore investors and may soon become the third-largest economy in the world.
(Manoj Purohit is a partner and leader and Ritesh Podar is a director - tax and regulatory services, at accounting and tax advisory BDO India.)