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The deadline for foreign portfolio investors (FPIs) to disclose their beneficial owners to the Securities and Exchange Board of India (SEBI) is rapidly approaching, set to expire on September 9th. While a significant number of FPIs have complied with the new regulations, some have sought legal recourse to avoid adhering to the stringent requirements. The primary concern revolves around the potential for round tripping, a practice where promoters manipulate investments through the FPI route to circumvent regulatory disclosures and requirements.
Two Mauritius-based FPIs, LTS Investment Funds and Lotus Global Investment, have filed appeals with the Securities Appellate Tribunal, seeking exemptions from Sebi's new norms. Both FPIs were mentioned in the January 2023 report on the Adani Group by US-based short-seller Hindenburg Research. They argue that Sebi's directives discriminate against them by imposing conditions not applied to other FPIs, and they have requested an extension until March 2025 to comply. This underscores the potential for regulatory disparities and inconsistencies that FPIs face within the Indian market.
The origin of the regulations lies in Sebi's concern regarding concentrated investments held by FPIs in single corporate groups. These concentrated investments raise the alarm of possible promoter manipulation through the FPI route. Sebi's goal is to prevent promoters from using the FPI route to circumvent regulations such as the Substantial Acquisition of Shares and Takeovers Regulations, 2011 (SAST Regulations), and the Minimum Public Shareholding (MPS) requirements for listed companies. The regulations aim to create transparency and deter manipulation within the Indian market.
The market experienced a sell-off in August, which can be attributed, in part, to the approaching deadline for FPI disclosures. FPIs withdrew a substantial Rs 20,339 crore from the market during August. This sell-off was further exacerbated by the pressure to comply with the new regulations. FPIs failing to meet the disclosure requirements face disqualification from investing in India, forcing them to liquidate their holdings. This regulatory pressure has contributed to the broader decline in the stock market.
The regulations require FPIs to provide granular details of all entities holding any ownership, economic interest, or exercising control in the FPI. 'Economic interest' refers to returns from investments made by the FPI, while 'ownership interest' denotes ownership of shares or capital of the entity or entitlement to profit from its activities. FPIs holding more than 50 per cent of their Indian equity assets under management (AUM) in a single corporate group or holding over Rs 25,000 crore of equity AUM in the Indian markets are required to provide these disclosures.
Source: Deadline for beneficial ownership of FPI holdings ends on Sept 9