After the Hindenburg report raised concerns about investment in the Adani Group of Companies through foreign routes, it was a wake-up call for the Indian stock market, especially for retail investors and the market regulator, SEBI. The alleged investment through foreign routes posed significant risks for them. In order to prevent such situations and ensure transparency, the Securities and Exchange Board of India (SEBI) has taken stringent steps regarding – FPI investments. SEBI is planning to introduce a new rule concerning FPI investments. So, what does this new rule by SBI on FPI investments entail?
According to the new FPI Investment norms:
FPIs with exposure exceeding 50 percent within a single group or FPIs with assets in the Indian equity market above Rs 25,000 crore will be labeled as “high risk.” They will be required to provide additional information such as full identification of ownership, economic interests, and control rights. Failure to disclose such information may lead to the cancellation of their FPI registration.
Why is this rule being implemented?
This rule aims to address a serious issue where some promoters try to bypass minimum public shareholding (MPS) norms by obtaining additional shares through this foreign route. SEBI believes that certain corporate groups’ promoters attempt to evade MPS regulatory requirements through the FPI route, and this new rule is intended to curb such practices.
With this proposed norm, SEBI aims to identify granular ownership details, distinguishing between natural individuals, public retail funds, and large public-listed corporates. This simplified norm enhances transparency. If this proposal is accepted, experts believe that India’s FPI disclosure regime would become the strictest globally.
Is the New FPI Rule by SEBI on FPI Investments applicable to all FPIs?
No, these stricter norms are not applicable to all FPIs. SEBI categorizes FPIs into three categories: High Risk, Low Risk, and Moderate Risk. Entities related to the government, such as central banks and sovereign wealth funds, fall under the low-risk category, while pension funds and public retail funds are categorized as “moderate risk.” According to SEBI, FPI assets under custody (AUC) amounting to around Rs 2.6 trillion or 6 percent of the total FPI AUC would be classified as “high risk.”
What is the current rule of SEBI regarding FPI Ownership and Investments?
Currently, as per the Prevention of Money Laundering Act (PMLA) norms, identification of beneficial owners (BOs) is based on certain thresholds such as 10% or 25% ownership. However, individual natural persons are generally not identified as BOs of FPIs since most investor entities fall within the FPI threshold. (For details – check SEBI Doc)
How much time will be given to comply with the new rule?
FPIs with holdings exceeding 50 percent within a single corporate group will be given a six-month period to reduce their exposure. Similarly, newly established FPIs will also have a similar time period. Additionally, existing high-risk FPIs with overall holdings exceeding Rs 25,000 crore in the Indian equity market will also need to comply with the additional disclosure requirements within six months.
While these additional norms strengthen certain aspects, some argue that they should not discourage FPIs from investing in the Indian market, as increased FPI investments benefits both stocks and the overall market.
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