In terms of a circular dated August 24, 2023 (August Circular), the Securities and Exchange Board of India (SEBI) issued a framework for additional disclosure requirements for Foreign Portfolio Investors (FPIs) mandating FPIs: (a) with equity assets under management (AUM) exceeding INR 25,000 crores in the Indian market, either individually or as an investor group; or (b) holding more than 50% of their AUM in a single Indian corporate group, to provide granular details of each and every investor / stakeholder on a look through basis to determine whether such FPI can be considered domiciled in a land bordering country (LBC) or not.
In view of practical difficulties faced by industry participants in complying with the aforesaid additional disclosure requirements based on size and / or concentration criteria (as mentioned above) given their size and huge investor base, SEBI released a consultation paper dated July 30, 2024 (Consultation Paper) proposing tweaking the disclosure requirements for certain FPIs requiring detailed disclosures only if the investors / stakeholders belong to LBCs and if their holdings in the FPI exceed certain thresholds.
SEBI made the following proposals and recommendations under the Consultation Paper:
(a) The Consultation Paper recommends adopting risk-based thresholds for granular disclosures on part of FPIs instead of requiring details of all investors holding interest, ownership or control in the FPI, which are based on the nationality of investor entities (including individuals) and the extent of their holdings in the FPI. This would be sufficient for SEBI to determine whether the FPI originates from and is controlled by entities (including individuals) belonging to LBCs. Essentially, this would mean that FPIs with equity AUM of more than INR 25,000 crores that are making disclosures to the extent that their categorization as LBC or non-LBC entities is possible, need not undertake detailed disclosures in respect of each and every investor.
(b) The risk-based criteria proposed by SEBI can be summarized as under:
- in case entities owning / controlling / holding economic interest in more than 50% of the AUM of an FPI, belong to an LBC, then the FPI will be deemed an LBC entity and no further additional disclosures will be required;
- in case entities owning / controlling / holding economic interest in more than 67% of the AUM of an FPI, belong to a non-LBC, then the FPI will be considered a non-LBC entity and no further detailed disclosures will be required; and
- however, in case the aforesaid holding thresholds are not met, then the concerned FPI will be required to undertake full granular disclosures of all investors / stakeholders owning / controlling / holding economic interest in the FPI. Categorization of FPIs as LBC or non-LBC entities shall be done based on the nationality of the majority investor entities (i.e. entities holding more than 50% interest in the AUM of the FPI).
(c) SEBI has proposed that classification of FPIs as an LBC or non-LBC entities shall be based on actual disclosures made by designated depository participants in respect of nationality of investors instead of just relying on declarations made by FPIs in that regard.
(d) The proposals are meant to exclusively address the difficulties faced by FPIs that breach the size threshold (i.e. FPIs having equity AUM of more than INR 25,000 crores) in making granular disclosures. The concentration threshold (i.e. FPIs holding more than 50% of their equity AUM in a single Indian corporate group) prescribed in the August Circular continues to be applicable for the purposes of making additional disclosures.
Conclusion
SEBI’s proposals in this Consultation Paper are aimed at advancing ease of compliance for large FPIs having a huge and diversified investor pool which makes it impossible to make granular disclosures in respect of each and every investor / stakeholder. SEBI’s decision with respect to these recommendations are awaited.