As foreign investors betting on Indian bourses face a new regime of elaborate disclosures, appeals are being made to the market regulator to spare those with insignificant holdings in local listed entities from sharing granular information.
According to the recommendations of a consultation paper, which are soon expected to be transformed into regulations by the Securities and Exchange Board of India (Sebi), a foreign portfolio investor (FPI) which deploys 50% or more of its money in the stocks of a single corporate group will have to reveal the ultimate beneficial owners (UBOs) – down to the last natural persons – behind every investor in the fund pool.
The new disclosure standards, which many find onerous, were triggered by the Adani-Hindenburg fiasco and allegations of offshore entities acting as fronts of Indian promoters of the investee companies.
During recent interactions with Sebi, the custodians of FPIs have put across the point that a fund investing a predominant part of its corpus in the companies of a group should not necessarily be a cause of concern as long as the fund’s shareholdings in them are minuscule. They said what matters more is how much an FPI ‘holds’ in a company and not how much it ‘invests’.
‘Genuine Investors could Suffer’
“The entire purpose of enhancing the disclosure is to identify situations whether any surrogate ownership by FPI exists in such entities. Given this primary objective, it would make sense for Sebi to also put in an additional criterion for such granular UBO disclosures to kick in – wherein there should also be some meaningful individual threshold ownership in the entities besides the proposed parameters,” said Siddharth Shah, senior partner at law firm Khaitan & Co. “Otherwise, this could lead to situations where even genuine investors wanting to take concentrated bets on a specific stock or a group of companies without any surrogate ownership will run the fear of being caught into such enhanced disclosure regime and at some level may start keeping themselves away from a market which poses such friction,” he said.
In other words, there is no need to red-flag an FPI investing 50% or more of its corpus in the companies of a group but holding as little as 0.2-0.5% of the equity of these companies.
Under the circumstances, the market regulator should decide a cut-off level, and funds having stakes above this cut-off level should be asked to give detailed disclosures, feel FPIs and custodians.
“Striking a good balance between efficiency and transparency is a must for a market to remain attractive for global investors on a sustainable basis in the long term,” said Shah.
Since they undertake the due diligence and act as bookkeepers, the custodians – which are large multinationals and private banks besides some non-bank institutions – have sought clarity on a few other issues.
Spell Out PRFs
Besides the trigger of investing 50% of money, the Sebi paper recommends that any FPI whose aggregate exposure to Indian equities exceeds Rs 25,000 crore will also have to share UBO details of all investors. However, pension funds and public retail funds (PRFs), considered as ‘low-risk’, are exempted from such detailed disclosures. In this context, the custodians want Sebi to give a more detailed definition of ‘public retail fund’.
The September 2019 FPI regulations give a broad definition of PRF. “Now, while a fund may be open to subscription to all kinds of investors, is it still a PRF if the minimum subscription requirement is quite high, say at $100,000?” said a fund adviser.
“Few funds hold stocks worth ₹25,000 crore. The two GQG funds together hold close to ₹25,000 in various Adani companies. But if a custodian has to club the investments by the two funds and categorise the two funds as PRFs, a more specific definition of PRF would help,” said the person.
The proposed UBO disclosure for ‘high-risk’ FPIs would mark a further tightening of the current rule under which the last natural persons have to be disclosed for an investor with 10% or more beneficial ownership in a fund. Earlier, the threshold levels were 25% and 15%. Also, FPIs have to inform custodians within seven working days of any ‘indirect or direct change’ in control, ownership and structure. The custodians have represented for extending this to at least 30 days.
By the end of September, FPI custodians have to disclose the UBOs for all 10% owners in each FPI.
