New Delhi: Against the backdrop of its ongoing probe into the Adani Group, markets regulator the Securities and Exchange Board of India (SEBI) has proposed more stringent disclosure requirements with respect to the ownership structure of foreign investors in Indian companies.
In a discussion paper released on Wednesday, Sebi has identified some of the key concerns it is seeking to address, including concentrated holding of foreign investors in shares of Indian companies over a long period of time and the potential impact of government-imposed regulations. Fraud is involved. Place to regulate foreign investment from neighboring countries of India.
The first of these, the issue of foreign portfolio investment in Indian companies, has been in the news for the past few months as it has been given prominence in the allegations against the Adani group by US-based short seller Hindenburg Research.
Sebi is in the process of probing Adani group companies in the wake of allegations leveled by Hindenburg Research, which include “brazen stock manipulation and accounting fraud”.
“For greater investor protection, and to promote greater trust and transparency in the Indian securities market ecosystem, a need is felt for additional disclosures from certain types of Foreign Portfolio Investors (FPIs),” uploaded on SEBI’s website Read the counseling letter given.
“On the surface, any increased disclosure requirements may appear to detract from easy-to-do investments,” it said. “However, there can be no sustainable capital formation without transparency and trust.”
The market regulator said that, in order to minimize any inconvenience to foreign investors, the additional disclosure requirements would be restricted to “objectively identified high-risk FPIs” who have significant equity holdings, either in a group or There are concentrated holdings.
If SEBI’s proposed new regulations are notified, these FPIs will have to make additional detailed disclosures about ownership, economic interest and control of such funds.
“The consultation paper issued by SEBI on additional disclosures by FPIs is welcome and can go a long way in bringing transparency in high-risk FPIs,” Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services, told ThePrint.
“It is clear that the genesis of this consultation paper is in the issue of Adani shares, where SEBI could not identify the beneficial owners of certain foreign portfolio investments in Adani shares as the existing rules are lax in identifying the real owners of several investments.” Are.” Added.
Vijayakumar also said that the proposed guidelines are “welcome” and that stocks in which “rightly disclosed FPI investments have nothing to worry about”.
holding concentration
The Sebi paper noted that some FPIs have concentrated a substantial portion of their overall portfolio in a single company or group company, and that these investments have been stagnant over a long period of time.
SEBI said, “Such concentrated investments raise concerns and the possibility that promoters of such corporate groups, or other investors acting in concert, may use the FPI route to circumvent regulatory requirements such as maintaining minimum public shareholding (MPS).” You can use.”
“If this were the case, the apparent free float in a listed company may not be its actual free float, thereby increasing the risk of price manipulation in such scrips.” A free float is used to denote the shares of a listed company that are readily available for trading.
Minimum public shareholding refers to the criteria that determine the percentage of public holding in a listed company. As per the Securities Contracts (Regulation) Rules, 1957, this limit is currently 25 per cent.
SEBI’s concern is that promoters of Indian listed companies are evading regulatory requirements, routing their funds through FPIs, and investing in their own companies. In other words, the fear is that owners of Indian companies are masquerading as public shareholders and thereby controlling more of their shares than is allowed.
SEBI said, “In order to confirm that there is no such fraud in MPS or other related regulations, detailed information about ownership, economic interest and control of FPIs with concentrated equity holding in single companies or business groups Need to get.” ,
SEBI tightens rules for neighbors
In April 2020, the government amended its foreign direct investment policy to “prevent opportunistic acquisitions/takeovers of Indian companies due to the COVID-19 pandemic”. Under these new rules, a company registered in a country sharing a land border with India can invest in an Indian company only after obtaining permission from the Indian government.
These rules were issued as part of a document called Press Note 3.
“While Press Note 3 is not applicable to FPI investments, the FPI route can potentially be misused to circumvent the terms of Press Note 3,” Sebi said. “For this, there is a need to identify on a wide scale investors with large equity portfolios in high-risk FPIs, whose investors may be located outside the land border countries.”
Sebi said there is also a possibility that a high-risk FPI may itself be based in a country that does not share a land border with India, adding that investors in such FPIs may be from land-border countries.
Risk Classification of FPIs
To implement these new disclosure norms, SEBI proposed to classify FPIs into three categories.
Low-risk FPIs would include government and government-related entities such as central banks, sovereign wealth funds, etc., as the ownership, economic and controlling interest in such entities is known to be majorly owned by the government of the country concerned.
Moderate risk FPIs are pension funds and public retail funds, which have wide and scattered investors in such funds.
All other FPIs, including those with essentially concentrated holdings, will be classified as high risk FPIs.
“For the time being, it is proposed that high-risk FPIs having more than 50 per cent equity assets under management in the same corporate group shall comply with the requirements for additional disclosures,” Sebi said.
(Editing by Amritansh Arora)
Read also: If LIC sells its Adani shares today, it will make a profit of Rs 11,000 crore.