Additional Disclosure Norms from High-Risk Foreign Portfolio Investors (FPIs)

2nd June, 2023 Economy

Disclaimer: Copyright infringement not intended.

Context

SEBI floated a consultation paper mandating additional disclosure norms from high-risk foreign portfolio investors (FPIs).

FPIs: https://www.iasgyan.in/daily-current-affairs/foreign-portfolio-investors-fpis

SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi

What is the objective of the recent consultation paper?

SEBI said there is a need for additional disclosures for certain types of FPIs in order to have greater investor protection, and for fostering greater trust and transparency in the Indian securities market ecosystem.
The paper has mandated additional disclosure norms from these FPIs to guard against possible circumvention of Minimum Public Shareholding (MPS), and to prevent possible misuse of the FPI route.

UNDERSTANDING THE MPS RULE IN INDIA

The Minimum Public Shareholding (MPS) rule is applicable to all listed companies in India. As per the rule, 25% of the outstanding equity shares of the company must be compulsorily held by the public. Here ‘public’ is defined as non-promoter shareholders. Where promoters are holding more than 75%, they have to mandatorily divest additional shares to the public to comply with the MPS rule.

This MPS rule was first implemented after the amendment to the Securities Contracts Regulation Rules by SEBI in 2010. As per this rule, promoters of listed Indian companies (other than PSU companies) holding more than 75% had to compulsorily sell their additional holdings to bring it down to maximum 75%. Such stake reduction could be done either by placing shares with institutions or by issuing rights shares to dilute their holdings.

SEBI said such disclosures must be unconstrained by any materiality thresholds set by the PMLA (Prevention of Money Laundering) rules and FPI regulations.
The paper has proposed to categorize FPIs into high, moderate, and low risk. All FPIs except for government and government-related entities such as central banks, sovereign wealth funds, and pension funds or public retail funds, are proposed to be categorized as high-risk FPIs.

NOTE: The consultation paper comes shortly after the US-based short seller Hindenburg in its research report, released in January this year, had alleged that some FPIs held a significant stake in the listed companies of the Adani Group. The Group has denied these allegations.

READ ABOUT PMLA: https://www.iasgyan.in/daily-current-affairs/pmla

What has SEBI proposed?

To mitigate the risk of circumvention of regulations such as MPS, and to prevent potential misuse of the FPI route to circumvent Press Note 3 stipulations, the markets regulator has proposed that enhanced transparency measures for fully identifying all holders of ownership, economic, and control rights may be mandated for certain high-risk FPIs.
It proposed that high-risk FPIs, holding more than 50 per cent of their equity Asset Under Management (AUM) in a single corporate group, would be required to comply with the requirements for additional disclosures.
Also, the existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will also be required to comply with new disclosure requirements. They will have to follow the new norms within 6 months, failing which the FPI will have to bring down its AUM below the threshold within a time frame.

READ ABOUT AUM: https://www.iasgyan.in/daily-current-affairs/assets-under-management-aum

What is Press Note 3?

During the Covid-19 pandemic, the government amended the foreign direct investment (FDI) policy through a Press Note 3 (2020) on April 17, 2020. The amendments were said to have made to check opportunistic takeovers/acquisitions of stressed Indian companies at a cheaper valuation.
Also, the existing high-risk FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore will also be required to comply with new disclosure requirements. They will have to follow the new norms within 6 months, failing which the FPI will have to bring down its AUM below the threshold within a time frame.

Will the proposed norms be applicable to FPIs?

The capital markets regulator said the proposed additional requirements are for high-risk FPIs and will not impact low-risk and moderate-risk FPIs in any manner.

PRACTICE QUESTION

Q. Consider the following statements:

1. Foreign portfolio investors (FPIs) are required to comply with the Foreign Exchange Management Act, 1999 and the Income-tax Act, 1961.

2. The Minimum Public Shareholding (MPS) rule is applicable to all listed companies in India and as per the rule, 25% of the outstanding equity shares of the company must be compulsorily held by the public.

How many of the above statements are correct?

a. Only one

b. Only two

c. Both statements.

d. None.

Answer: Both statements are correct .