‘HIGH-RISK’ FPIS

SEBI floated a consultation paper mandating additional disclosure norms from high-risk foreign portfolio investors (FPIs) that have either concentrated single group exposures and/ or significant overall holdings in their India equity investment portfolio.
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 to circumvent the requirements of Press Note 3 (PN3).
SEBI said such disclosures must be unconstrained by any materiality thresholds set by the PMLA (Prevention of Money Laundering) rules and FPI regulations.

Categorization of FPIs:

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.

Proposal of SEBI:

SEBI 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.
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.

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) in 2020.
The amendments were said to have made to check opportunistic takeovers/acquisitions of stressed Indian companies at a cheaper valuation.
The new regulations required an entity of a country, sharing land border with India or where the beneficial owner of an investment into India is situated or is a citizen of any such country, to invest only under the Government route.
Also, in the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the said policy amendment, such subsequent change in beneficial ownership will also require government approval.

How is the FPI route misused for circumvention of PN3 regulations?

While Press Note 3 is not applicable to FPI investments, the FPI route could potentially be misused to circumvent the stipulations of Press Note 3.
It said there is a need to identify investors in high-risk FPIs with large equity portfolios at a granular level, whose investors may be based out of land bordering countries.
In certain instances, it has been observed that while the high-risk FPI itself may be situated out of a non–land bordering country, the investors in such high-risk FPIs may be based out of land–bordering countries.

What is Foreign Portfolio Investment?

Foreign Portfolio Investment (FPI) refers to the purchase and holding of a wide array of foreign financial assets by investors seeking to invest in a country outside their own.
Foreign portfolio holders have access to a range of investment instruments such as stocks, bonds, mutual funds, derivatives, fixed deposits, etc.
These investment opportunities are made keeping a factor of relatively high risk for high reward in mind.
The primary difference between an FPI and an FDI is the factor of ownership.
In FDI one seeks ownership, whereas Foreign Portfolio Investment is a form of investment in the assets of a foreign enterprise such as stocks or bonds.
FPI does not offer any form of control over the entity and hence offers no ownership of the entity.

SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB

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