Enhancing market transparency: Sebi’s new rules for more detailed disclosures

Sebi enforces detailed disclosures for high-risk foreign investors, bolstering the market transparency and guarding against several potential manipulation.

The Securities and Exchange Board of India (Sebi) recently made a case for more detailed disclosures from “objectively identified and high-risk” foreign portfolio investors (FPI). On Wednesday, the regulator’s board put out rules to ensure that foreign investors who have concentrated single-group equity exposures, or those that have significant equity holdings, furnish information relating to ownership, economic interest and control. It is an important step as Sebi needs access to such information. Concentrated investments allow investors to act on their own or in concert with others to bypass rules such as those on maintaining Minimum Public Shareholding (MPS). In these situations, the perceived free float might not be actual, making the stock vulnerable to price manipulation.

The regulator has mandated that FPIs that own more than 50% of their Indian equity assets in a single corporate group or those that individually—or together with their investor group—own more than `25,000 crore in equity assets, must provide granular data on their holdings. That might seem a small amount given that India’s market capitalisation is nudging `295 trillion but this has more to do with companies and groups of companies and, therefore, even a holding of $3 billion is relevant. Only 21 companies today command a market capitalisation of `2.5 trillion or more. FPIs may complain that the rules are too restrictive, but knowing the ultimate owner of the shareholding is important because there could be related parties involved.

Although Sebi has claimed in the past it could identify the end-beneficiaries, it probably couldn’t. In fact, the current management has found that while details of beneficial owners (BO), based on the control or fund ownership, are generally available, there is often no ‘natural person’ identified as the BO of the FPI based on the economic interest. This is because each investor entity in the FPI is generally found to be below the threshold of the Prevention of Money Laundering (PML) rules. Worryingly, it is possible that the same natural person holds a meaningful economic interest in the FPI through different investment entities, each of which is individually below the threshold for identification as a BO. Consequently, the regulator would be well within its rights to ask for the identities of owners, ignoring any PML rules or secrecy laws that may be applicable in their home jurisdictions, including tax havens.

Sebi has also asked companies that have already listed their non-convertible debentures (NCDs) to also list forthcoming issuances on the exchanges. The move should help deepen the corporate bond markets as a continuous supply of paper will undoubtedly make the market more liquid and facilitate price discovery. This, together with better disclosures, would draw more investors to the listed market, thereby reducing volumes of unlisted bonds and mis-selling. Sebi has also enabled the de-listing of debt securities provided all the holders approve.

The rationale for requiring every investor to okay the delisting is that NCDs are issued for a specific tenure while equities are perpetual in nature. Yet another move to reduce the time taken to list shares post an IPO—from 6 days to 3—should help speed up processes, and will rein in kerb trading and speed up the return of funds to non-allottees. Investors, including global funds, have always struggled with the duration of time for which funds were not available to them post closure of the issue. Overall, Sebi’s decisions are sensible.