Disclosure norms: FPIs may get 3 months to cut exposure

The custodians of these foreign funds have told the Securities and Exchange Board of India (Sebi) that existing FPIs can cut their investments below the cut-off levels fixed for closer scrutiny within three months from the date of notification of the new regulations compared with six months indicated earlier, said market circles.

In their feedback to Sebi, the fund industry and custodian circles have also said that the regulator should avoid the ‘high-risk’ tag in categorising FPIs which have large investments in the Indian equity market. The custodians are large banks – mostly multinational ones – and local non-banks acting as bookkeepers of the funds.

According to Sebi’s new regulations, FPIs – other than sovereign funds, pension funds and public retail funds – having more than 50% of their equity assets under management in a single corporate group or with total equity exposure of ₹25,000 crore or more would have to share the identities of their ultimate beneficial owners (UBOs) who are the last natural persons behind the multiple vehicles in an FPI structure. The rules are expected to be notified soon.

Such funds with exposures exceeding the threshold levels were described as ‘high-risk’ by the regulator. “The term high risk may be misinterpreted in certain circles. Perhaps, Sebi can describe them differently, like ‘reportable entities’,” said an industry person.

“Originally, the term ‘high risk’ was used by custodians to identify certain jurisdictions with comparatively less stringent disclosure and anti-money laundering regulations,” said a banker.

Framing Definition
It is perceived by the market and the fund industry that while a ‘single corporate group’ would mean a group of companies having a common promoter, sections think that regulator may borrow features from the Companies Act to arrive at the final definition.

According to the corporate law, a majority holding requires consolidation of accounts of the subsidiary with the parent; a stake of 20% or more indicates “significant influence”; and, a 26% or more holding gives the stakeholder the status of a ‘statutory minority’ whose approval is necessary for passing any special resolution.

The custodian banks are of the view that since the funds having higher exposure would continue to trade, three months would be sufficient for them to reduce exposures within the new regulatory threshold levels.

No Impact on Ops
“This is unlike the situation five years ago when FPIs were given a six-month window to cut contributions from NRI (non-resident Indian) investors. Funds which failed to meet the deadline then had to shut shop. However, this time around no FPI which breaches the exposure limits would have to discontinue operations. They have simply to disclose more. So, three months would be enough to lower the exposure by funds which don’t want to disclose all UBOs,” said another industry official.

The regulatory view was that NRIs (which have other avenues to invest directly in the Indian stock market) as a group cannot have more than 50% share in the fund corpus and no single NRI can contribute beyond 25% to the fund pool.

The present UBO disclosures linked to higher exposure was first proposed in a Sebi consultation paper released in May-end. Most of the recommendations were approved by the Sebi board last week.

Besides this, all FPIs (irrespective of their exposure levels) would have to follow sterner disclosure norms, according to directives issued by the market regulator well before the publication of the consultation paper.