Sebi, RBI issue circular on changes in monitoring of FPI holdings

Move triggered by shareholding limit breach at HDFC Bank in 2017

The Securities and Exchange Board of India (Sebi), and the Reserve Bank of India (RBI), have issued a circular on changes in the monitoring of foreign investment holdings in listed companies. 

This was triggered by a breach in the rule on foreign shareholding at HDFC Bank a year before. 

Under the new framework, companies will have to appoint a depository for monitoring of foreign shareholding, including foreign portfolio investors (FPIs) and non-resident Indians. In a breach, foreign investors will be required to divest the excess quantity by selling these to domestic investors within five trading days of the date of settlement of the trades that caused the breach. Failure to do so will attract penal action from Sebi.

The depositories will  calculate  the  percentage  of  FPI  holding  in  a  company  and  the investment headroom available as of the end of a day. If the available room is less than three per cent of the aggregate FPI investment limit, the depositories will raise a red flag for that company. This data will be available on stock exchange platforms on an end-of- day basis. 

“The depositories shall inform the exchanges about activation of the red flag for the identified scrip. The exchanges shall issue the necessary public notifications on their respective websites. Once a red flag has been activated for a given scrip, the foreign investors shall take a conscious  decision  to  trade  in  the  shares  of  the  scrip, with  a  clear  understanding  that  in  the event of a breach of the aggregate FPI limits, the foreign investors shall be liable to disinvest the excess holding within five trading days from the date of settlement of the trades,” Sebi specified. 

In February 2017, the foreign ownership limit in HDFC Bank was breached, upon which RBI and Sebi suspended any further buying by FPIs  in the stock. That had jolted market players.