The Securities and Exchange Board of India (SEBI) in its 209th board meeting held on March 24, 2025, considered and approved the various measures towards ease of doing business and investor protection in regulatory frameworks governing foreign portfolio investors (FPIs) and alternative investment funds (AIFs). SEBI approved recommendations on increasing the threshold under size criteria in the additional disclosure framework applicable to FPIs and reviewing Regulation 17(a) of SEBI (AIF) Regulations, 2012 (AIF Regulations). SEBI’s approvals follow recommendations from two separate consultation papers dated January 10, 2025, and February 7, 2025, respectively.
Key amendments announced by SEBI have been discussed below:
- Increase of the threshold under size criteria in the additional disclosure framework applicable to FPIs
Under the existing framework, FPIs that either meet the concentration criteria (i.e., those that hold more than 50% of their assets under management (AUM) in a single Indian corporate group) or the size criteria (i.e., those having equity AUM exceeding INR 25,000 crores in the Indian market, either individually or as an investor group) are mandated to provide granular details of each investor/stakeholder (including individuals) holding economic interest, ownership or exercising control in an FPI, on a look through basis.
The concentration criterion was introduced to address the circumvention of disclosure obligations under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (SAST Regulations) or the requirement of maintaining minimum public shareholding (MPS) applicable to listed entities due to concentrated equity investments of FPIs, while the size criterion was introduced to address the issue of possible opportunistic takeovers by entities or beneficial owners belonging to land bordering countries in circumvention of Press Note 3 released by the Department for Promotion of Industry and Internal Trade (DPIIT) dated 17 April 2020.
SEBI has now approved a proposal to increase the threshold under the size criteria. Accordingly, the current threshold of INR 25,000 crores for equity AUM of an FPI in the Indian market will be raised to INR 50,000 crores. This approval comes in light of an 122% increase in market turnover between the financial years 2023-24 and 2024-25 (up till December 31, 2024) as per SEBI’s estimates. It has also been clarified that no changes are proposed in the concentration criteria stipulated for preventing circumvention of MPS requirements and the SAST Regulations. Additionally, all FPIs to continue to be liable to comply with Prevention of Money Laundering Act, 2002 norms, as applicable.
- Review of Regulation 17(a) of SEBI (AIF) Regulations, 2012 to enhance ease of doing business
Under the extant Regulation 17(a) of AIF Regulations, Category II AIFs must primarily invest in unlisted companies (directly or indirectly through investment in units of other AIFs) i.e., more than 50% of the investible funds of Category II AIFs must be invested in unlisted securities. However, the recently introduced Regulation 62A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) requires listed entities proposing to list any of its debt securities on stock exchange(s) at any time in the future on or after January 1, 2024, are mandatorily required to list any outstanding unlisted debt securities within three months from the date of the listing of the non‐convertible debt securities proposed to be listed (in the future). Accordingly, the aforesaid amendment to LODR Regulations could limit the pool of investment opportunities in unlisted debt securities available for Category II AIFs which make compliance with Regulation 17 (a) more onerous for such AIFs.
In order to mitigate the aforesaid regulatory challenge, SEBI has approved proposal to expand the scope of Regulation 17(a) to allow Category II AIFs to meet the 50% investment requirement by including listed debt securities with credit rating of ‘A’ or below as part of the investment pool alongside unlisted debt securities. Investments in listed debt securities with credit rating of ‘A’ or below will be treated as akin to investments in unlisted debt securities.
Conclusion
SEBI is likely to notify amendment regulations and/or circulars in respect of these decisions in the coming days.