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  • Context (IE): Last year in May, the Securities and Exchange Board of India (SEBI) released a consultation paper suggesting increased disclosures from certain Foreign Portfolio Investors (FPIs).
  • The suggested regulations aim to improve transparency by:
    • Thoroughly identifying the actual ownership of an entity within a holding.
    • Providing a clear depiction of economic interests in the holding.

Why did SEBI request additional disclosures from FPIs?

  • Sebi highlighted that certain FPIs hold a significant portion of their equity in a single company or corporate group.
  • This concentrated investment raises concerns that promoters or other investors might use FPI routes to bypass regulatory requirements such as,
    • Firstly, to prevent potential evasion of Minimum Public Shareholding (MPS) requirements.
    • Secondly, to avoid the misuse of the FPI route in bypassing the requirements outlined in Press Note 3 (updated April 2020).
  • Public shareholding, or the shares held by the public for a listed entity, must be at least 25% to continue being listed.

Press Note 3/PN3

  • The central government amended the FDI policy vide Press Note 3 in April 2020.
  • It required an entity sharing a land border with India, or where the beneficial owner is based out of any such country, can invest(FDI) only via the government route.
    • It may happen the FPI entity is located in country with which India does not share a land border.
    • Still, the investor in the FPI (or the beneficial owner of the FPI) might be a citizen and/or residing in such a country.
    • Proposed regulations in both cases would be able to trace such ownership & economic interest.

FPIs required to comply

  • High-risk FPIs holding more than 50% of their equity asset under management (AUM) in a single corporate group would have to make additional disclosures.
  • High-risk FPIs with an overall holding in the Indian equity market of over Rs 25,000 crore.
  • Non-compliance would result in the invalidation of the FPI’s registration. Consequently, these FPIs would need to cease operations within six months.
  • Asset under management: It is the total market value of all the financial assets that an individual or financial institution (mutual fund, venture capital firm, or depository institution) controls, typically on behalf of a client.

FPIs exempted

  • Sovereign wealth funds (SWFs).
  • Listed companies on certain global exchanges.
  • Public retail funds.
  • Other regulated pooled investment vehicles with diversified global holdings.

Foreign Portfolio Investment (FPIs)

  • It refers to the purchase of securities and other financial assets by investors from another country.
  • FPI holdings may consist of stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
  • Unlike direct ownership, FPI involves passive ownership, granting investors no control over ventures, property, or direct stakes in companies.
  • Investments made by Non-Resident Indians (NRIs) are not categorized as FPI.
  • Foreign Portfolio Investment (FPI) has emerged as a significant source of capital for Indian companies in recent years.
    • In 2021, FPIs have invested more than $26 billion in Indian equities and $14 billion in debt instruments.
  • Regulatory framework governing FPI in India
    • The Foreign Exchange Management Act, 1999.
    • SEBI’s regulations on foreign institutional investors (FIIs).
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