The Securities and Exchange Board of India (SEBI) on Wednesday released a consultation paper mandating additional disclosures around ownership from high-risk Foreign Portfolio Investors (FPIs) that have either concentrated single-group exposures or significant overall holdings in their India equity investment portfolio.

"For greater investor protection, and for fostering greater trust and transparency in the Indian securities market ecosystem, there is a felt need for additional disclosures from certain types of FPIs," the market watchdog says.

Any enhanced disclosure requirements may appear to detract from ease-of-doing investments. However, there can be no sustained capital formation without transparency and trust, the regulator says in its consultation paper.

The consultation paper comes days after the Supreme Court-appointed expert committee on Adani Group submitted its report. SEBI's investigation found 42 offshore contributors to the assets under management (AUM) of 13 FPIs that invested in Adani stocks. While SEBI has been attempting to find out contributors who have an economic interest in these FPIs, the regulator has "drawn a blank".

In India, the Prevention of Money Laundering Act, 2002 (PMLA) provides the framework for identifying the Beneficial Owners (BO) of legal entities. However, in 2018, the Act was amended to change the definition of 'Ultimate Beneficial Owner' and considered the 'Beneficial Owner' as the 'Ultimate Beneficial Owner'. Following the amendment, SEBI too removed the clause regarding mandatory disclosure of Ultimate Beneficial Owner in 2019.

Some FPIs have been observed to concentrate a substantial portion of their equity portfolio in a single company or group, SEBI says, adding that in some cases, these concentrated holdings have also been near static and maintained for a long time. "Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining Minimum Public Shareholding (MPS)," the market regulator says.

If this were the case, the apparent free float in a listed company may not be its true free float, increasing the risk of price manipulation in such scrips, it says.

The market regulator has proposed that high-risk FPIs holding more than 50% of their equity asset under management in a single corporate group would be required to comply with the requirements for additional disclosures.

Existing high-risk FPIs that have more than the 50% concentration threshold in a single corporate group will be provided a window of six months to bring down such exposure below 50%, before the need for additional disclosure requirements become effective.

New FPIs that have just begun investments will be allowed to cross the 50% group concentration threshold up to a period of six months without the need for additional disclosures becoming effective. Beyond six months, however, any crossing of the 50% concentration threshold by such FPIs will trigger the requirement for additional disclosures.

High-risk FPIs that momentarily breach the 50% group concentration investment threshold will be provided a window of 10 days to bring down such concentration, before the additional disclosure requirements become effective.

Failure to provide such additional granular disclosures wherever required will render the FPI registration invalid, says the SEBI paper. Such FPIs would be required to wind down within six months, it adds.

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