Concentration concerns

Sebi's proposal will make FPIs more transparent

The Securities and Exchange Board of India (Sebi) has released a consultation paper on the framework for mandating additional disclosures from foreign portfolio investors (FPIs) to guard against possible circumvention of minimum public shareholding (MPS) and misuse of the FPI route to circumvent Press Note 3 (PN3). This boils down to seeking the actual beneficial owners of shares held by an FPI, which has a concentrated portfolio. It tightens the disclosure requirements about beneficial ownership, which had earlier been relaxed. It should be welcomed as a move towards increasing transparency and reducing chances of price manipulation. This paper is likely triggered by the Hindenburg Research affair, where the US-based short-seller had alleged Adani Group used FPIs as fronts to hold shares in listed companies, taking actual promoter shareholdings beyond the maximum promoter limit of 75 per cent.

The MPS in a listed company is 25 per cent (except for certain public-sector undertakings). The PN3 flags investment in listed Indian companies from certain nations. Entities of nations sharing land borders with India, or where the beneficial owner of an investment in India is situated, or is a citizen of any such country, can invest only via the government route. The regulator is concerned that FPIs may be used as a front to conceal ownership of Indian shares by entities in such countries. The paper goes on to say that some FPIs concentrate a substantial portion of their equity portfolio in a single company, or in companies of a single group. Such concentrated investments raise concern that promoters of such groups, or other investors acting in concert, could use the FPI route for circumventing regulations. In such cases, the apparent free float may not be the true free float, increasing the risk of price manipulation.

To check if this is the case it will be necessary to list FPIs that have such a pattern of concentrated holdings. Then it would be necessary also to obtain granular information around the ownership of, or economic interest in and control of, such FPIs. The regulator estimates that FPI assets under management (AUM) of Rs 2.6 trillion — 6 per cent of total FPI equity AUM, and less than 1 per cent of Indian equity market capitalisation — may potentially be identified as high risk. Legislation such as the Prevention of Money Laundering Act, 2002, and the Prevention of Money Laundering (Maintenance of Records Rules), 2005, provides a framework for identifying beneficial owners. However, applying this in practice may be difficult, given that such entities are adept at layering ownership through a web of companies.

Currently Sebi proposes that high-risk FPIs holding more than 50 per cent of AUM in a single corporate group would be required to comply with requirements for additional disclosures, if such concentration exceeds a temporary window of 10 days. Such FPIs would have to provide the granular data of all entities with any ownership, economic interest, or control rights on a full “look-through basis”. This is qualified by exempting new FPIs for six months from inception and also exempting FPIs which are in the process of winding up. They would receive a window of six months to provide the information, or to dilute concentrations, or be asked to wind up.