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HomePoliticsAgainst Adani-Hindenburg saga backdrop, SEBI proposes tighter rules for foreign investors

Against Adani-Hindenburg saga backdrop, SEBI proposes tighter rules for foreign investors

New Delhi: Against the backdrop of its ongoing investigation into the Adani Group, markets regulator Securities and Exchange Board of India (SEBI) has proposed more stringent disclosure requirements regarding the ownership structures of foreign investors in Indian companies.

In a discussion paper released Wednesday, SEBI has identified a few key concerns it was seeking to address, including the concentrated holdings of foreign investors in the stocks of Indian companies for long periods of time, and the potential circumvention of rules the government had put in place to regulate foreign investments from India’s neighbouring countries.

The first of these issues, of foreign portfolio investments in Indian companies, has been in the news over the last few months due to the prominence given to it in the allegations levelled against the Adani Group by US-based short seller Hindenburg Research. 

SEBI is in the process of investigating Adani Group companies in the wake of allegations levelled against it by Hindenburg Research of engaging in “brazen stock manipulation and accounting fraud”.

“For greater investor protection, and for fostering greater trust and transparency in the Indian securities market ecosystem, there is a felt need for additional disclosures from certain types of Foreign Portfolio Investors (FPIs),” read the SEBI consultation paper uploaded on its website. 

“On the surface, any enhanced disclosure requirements may appear to detract from ease-of-doing investments,” it added. “However, there can be no sustained capital formation without transparency and trust.”

The markets regulator added that, in order to minimise any inconvenience to foreign investors, the additional disclosure requirements will be restricted to “objectively identified high-risk FPIs” that either have concentrated holdings in a single group or significant equity holdings. 

If SEBI’s proposed new rules get notified, these FPIs will have to provide additional granular disclosures around the ownership of, economic interest in, and control of such funds.

Dr. V.K. Vijayakumar, chief investment strategist at Geojit Financial Services told ThePrint, “The consultation paper floated by SEBI on additional disclosures by FPIs is welcome and can go a long way in bringing transparency in high risk FPI.”

“It is clear that this consultation paper has its genesis in the Adani stocks issue where SEBI couldn’t identify the beneficial owners of some foreign portfolio investments in Adani stocks since the existing regulations are lax in identifying the true owners of many investments,” he added.

Vijayakumar also said that the proposed guidelines are “welcome” and stocks where “FPI investments are properly disclosed have nothing to worry about”.

Also Read: ‘SEBI tried to apply laws that came into effect later’ — what SC panel said on Hindenburg-Adani probe

Concentration of holdings 

 The SEBI paper noted that it has observed some FPIs concentrating a substantial portion of their overall portfolio in a single company or group company, and that these investments have been static for a long time.  

“Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining Minimum Public Shareholding (MPS),” SEBI said. 

“If this were the case, the apparent free float in a listed company may not be its true free float, increasing the risk of price manipulation in such scrips (stocks),” it added. A free float is used to denote shares of a listed company that are readily available for trading.

Minimum public shareholding refers to the norms that stipulate the percentage of stake the public must hold in a listed company. This limit, according to the Securities Contracts (Regulation) Rules, 1957, is 25 per cent at the moment.

SEBI’s concern is that promoters of Indian listed companies may be 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 pretending to be public shareholders and thereby controlling more of their companies’ stakes than is allowed.

“To confirm that there is no such circumvention of MPS or other related regulations, it is necessary to obtain granular information around the ownership of, economic interest in, and control of FPIs with concentrated equity holdings in single companies or business groups,” SEBI said.

SEBI tightens norms for neighbours

In April 2020, the government amended its foreign direct investment policy to “curb opportunistic takeovers/acquisitions of Indian companies due to the COVID-19 pandemic”. Under these new rules, a company registered in a country with which India shares a land border could invest in an Indian company only after having obtained permission from the Government of India. 

These rules were released as part of a document called Press Note 3.

“While Press Note 3 is not applicable to FPI investments, the FPI route could potentially be misused to circumvent the stipulations of Press Note 3,” SEBI noted. “To this end, there is a need to identify investors in high-risk FPIs with large equity portfolios at a granular level, whose investors may be based out of land bordering countries.” 

SEBI said there is also a possibility that while a high-risk FPI itself may be located in a country that does not share a land border with India, the investors in such FPIs might be from land-bordering countries.

Risk categorisation of FPIs 

In order for these new disclosure norms to apply, SEBI proposed to classify FPIs into three categories.

The Low Risk FPIs would include government and government-related entities such as central banks, sovereign wealth funds, etc. since the ownership, economic and controlling interest in such entities is known due to the predominant ownership by the government of the respective country.

Moderate Risk FPIs are pension funds and public retail funds that have widespread and dispersed investors in such funds. 

All other FPIs, which basically includes those that have concentrated holdings, would be classified as High Risk FPIs. 

“For now, it is proposed that high-risk FPIs, holding more than 50 per cent of their equity Asset Under Management in a single corporate group, would be required to comply with the requirements for additional disclosures,” SEBI said.

(Edited by Amrtansh Arora)

Also Read: LIC would make Rs 11,000 crore profit if it were to sell its Adani stocks today

Source: The Print

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