SEBI takes a promising step forward

SEBI’s FPI disclosure proposal raises concerns about timing and the necessity for stricter ownership thresholds to prevent circumvention.

The Securities and Exchange Board (SEBI) recently published a consultation paper seeking public responses on the proposed guidelines on additional public disclosures by Foreign Portfolio Investors (FPI) with over ₹25,000 crore of AUM.

A good move, but one wonders if it is to assuage feelings triggered by Hindenburg allegations and the subsequent deliberations that played out.

While it is commendable that SEBI has taken this step, it is important to acknowledge that these regulatory remits are long overdue. Certain aspects of the threshold ownership for disclosures could be further tightened to ensure their effectiveness and prevent circumvention of the rules.

According to the consultation paper, SEBI aims to focus on objectively identifying high-risk FPIs that exhibit concentrated single-group equity exposures or hold significant equity stakes. These identified FPIs would be mandated to provide additional granular disclosures related to ownership, economic interest, and control of such funds.

Initially, FPIs with more than 50 per cent of their equity AUM in a single corporate group should comply with the enhanced disclosure requirements, extending to natural persons, public retail funds, or large public listed entities.

This move is a step towards addressing the challenges posed by the current regulations in identifying the ultimate beneficial owners of FPIs.

It is worth noting that the consultation paper indicates that only a limited number of FPIs, estimated to be around six per cent of the total FPI equity AUM (approximately ₹2.6-lakh crore) and less than one per cent of India’s total equity market capitalisation, may potentially fall under the high-risk category. The proposed guidelines would categorise all funds, excluding those owned by the government, sovereign wealth funds, pension funds, and public retail funds, as high-risk offshore funds.

This proposal is not only essential for domestic financial stability but also aligns with Financial Action Task Force (FATF) standards.

With the concept of Beneficial Ownership (BO) at the forefront, these regulations aim to promote financial stability and ensure that investments are made through legitimate channels. Such disclosures play a vital role in safeguarding against illicit financial activities and addressing concerns related to tax evasion, opaque ownership to circumvent Indian ownership laws, money laundering and terrorist financing.

Plugging loopholes

Another crucial aspect of tighter scrutiny is the prevention of regulatory arbitrage, where market participants may attempt to exploit loopholes or set up complex structures to circumvent regulations.

By ensuring that all institutional and overseas investors are held to rigorous standards, SEBI can instil trust in the Indian market, both domestically and internationally. While the proposed regulations are a positive step, it is imperative to reconsider the threshold ownership for disclosures.

Currently, the threshold is set at over 50 per cent, which potentially opens avenues for funds (or those wanting to obfuscate their ownership) to establish side-entities to evade disclosure norms.

To prevent such circumvention, it is necessary to revise the threshold to a more reasonable level, such as 20 per cent or lower. This adjustment would ensure that a broader range of investors fall within the purview of disclosures, strengthening transparency and reducing the chances of regulatory arbitrage.

The regulatory challenge of increased supervisory load can be reduced, as and when Indian financial regulators use more of real-time digitally-led activity-based supervision, with help of AI, Ml tools. Anyway, that’s an area SEBI seems to be invested into, as it has mentioned recently too.

Written by Srinath Sridharan. The writer is a Policy Researcher & Corporate Advisor