FPI disclosure norms: No immediate deadline for FPIs to sell

Even as the buzz gets louder that foreign portfolio investors (FPIs) are selling Indian shares to avoid complying with new disclosure norms that are set to kick in from February 1, sources familiar with the development say that the universe of foreign investors that will have to make additional disclosures is much smaller than earlier estimates and also there is no immediate deadline for such investors to liquidate their holdings.  

“FPIs that may be required to provide enhanced disclosures are expected to be significantly less than estimated in the consultation paper and the SEBI board note,” said a source familiar with the development.  

A consultation paper issued by the Securities and Exchange Board of India (Sebi) in May last year had stated that FPI assets under management (AUM) of only around Rs 2.6 lakh crore—around six per cent of the total FPI equity AUM and less than one per cent of India total equity market capitalisation—may potentially be identified as high-risk FPIs.  

“There is no immediate deadline or cliff for FPIs to liquidate any holdings... If they continue to meet the criteria for enhanced disclosures as of January end, they would have an added 10/30 working days to provide the additional details required. Even thereafter, if they fail to provide any details, they would have a further 6 months to reduce their holdings,” added the source.  

This assumes significance as the recent correction in the markets on the back of huge selling by FPIs—foreign investors are net sellers at nearly $2 billion in the current month—is being largely attributed to the set of foreign investors that might be forced to make additional disclosures to comply with the new norms that will come into effect from February 1.  

In a circular issued on August last year, capital market regulator Securities and Exchange Board of India (Sebi) introduced additional norms related to disclosure of beneficial owners for FPIs holding more than 50 per cent of their Indian equity assets under management (AUM) in a single Indian corporate group or those that individually, or along with their investor group, hold more than Rs 25,000 crore worth of Indian stocks.  

The Sebi move was largely attributed to reports highlighting that some FPIs holding shares in Adani Group companies were believed to have the bulk of their India exposure in only Adani Group companies.   

Further, their ultimate beneficial ownership was also being questioned amidst allegations of round tripping of funds.  

In January last year, the Hindenburg report had also alleged that some of these FPIs were just fronts of the promoter entities – an allegation that has been strongly refuted by the Gautam Adani-owned diversified conglomerate.  

“Certain FPIs have been observed to hold concentrated portion of their equity portfolio in a single investee company/corporate group. Such concentrated investments raise the concern and possibility that promoters of such investee companies/corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements,” stated the Sebi circular issued in August last year.  

Meanwhile, it is believed that the number of FPIs that would have to comply with the new rules would be much smaller than the earlier estimates as various exemptions have been provided based on certain parameters.  

“Exemption from enhanced disclosures have been provided to FPIs that are SWFs, listed companies on certain global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings,” said the person quoted above.  

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