Foreign portfolio investors (FPIs) are seeking exemption for unintended or passive breaches of the stricter disclosure norms proposed by the Indian markets regulator.
Last month, the Securities and Exchange Board of India (Sebi) proposed that any FPI with more than 50% of its portfolio invested in a single corporate group in India be termed ‘high risk’, and that such funds must submit granular data on their end investors.
In a letter to Sebi dated 20 June, the FPI lobby group Asia Securities Industry and Financial Markets Association (Asifma) said the 50% rule might impact long-only FPIs that do not actively trade in the market. The lobby group, representing the interests of leading offshore investors, such as JP Morgan, Goldman Sachs, and Blackrock, requested Sebi to make the 50% rule applicable only if the threshold has been breached due to incremental new buying by an FPI in a single corporate group.
An email sent to a Sebi spokesperson remained unanswered.
“In case of long-only FPIs or FPIs that do not trade dynamically in the Indian capital markets, there could be situations where the threshold of holding more than 50% of their equity AUC (assets under custody) may be breached due to no action on their part but on account of fluctuations in the price of the equity shares of the Indian investee company,” Asifma said in the 17-page representation to Sebi.
“We hereby submit that in such cases, the FPI should not be required to comply with additional disclosure requirements or bring down its exposure provided the FPI does not make incremental investments in the single corporate group.”
For instance, say an FPI has invested 45% of its India assets in a single corporate group, and the rest of the 65% is invested across various other companies. Now, if the shares of the corporate group rally significantly and if shares of the rest of the portfolio companies underperform significantly, it could lead to a scenario where the FPI’s exposure to the single corporate group exceeds the 50% threshold. In such a scenario, the FPI would be required to either sell existing shares of the single corporate group to bring down the exposure below 50% or provide granular investor data to the regulator.
Suresh Swamy, a partner at Price Waterhouse & Co. Llp, said Sebi’s disclosure rules should be flexible and provide a more relaxed disclosure norm for passive breaches.
“It is also possible that while the exposure of the high-risk FPIs would be more than 50% of their equity AUM (assets under management) in a single corporate group, the investment in absolute monetary terms may not be material enough to impact the free float of the corporate group,” Swamy said.
“An appropriate monetary threshold should also be specified for disclosures to be triggered for high-risk FPIs. Sebi will have to tread a fine balance between adequate disclosure and ease of investing in India.”
Asifma has also asked Sebi to bring mutual funds regulated by the US Securities and Exchange Commission and Japan’s securities investment trusts, among others, under the definition of public funds.
According to Sebi’s proposal, public funds would be exempt from the disclosure norms. Currently, only funds such as sovereign wealth and pension funds are categorized as public funds.
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Updated: 26 Jun 2023, 11:19 PM IST