Relief for Foreign Investors in Disclosure Obligations
Relief for Foreign Investors in Disclosure Obligations
Amid evolving regulatory norms, the stock market watchdog has decided not to enforce the mandatory selling of holdings by foreign investors who have failed to disclose their ultimate beneficiaries. This development, set to take effect from 1st February, comes as a welcome alleviation for the investor community. The decision marks a pivotal shift, alleviating concerns that have cast a shadow over the market in recent times.
Exemption and Extended Compliance Time for Certain FPI Categories
The exemption from the new disclosure rule extends to specific categories of foreign portfolio investors (FPIs), granting them relief from the enhanced disclosure requirements. Moreover, certain FPIs will benefit from an extended timeframe to ensure compliance, providing them with the necessary leeway to adhere to the regulatory framework effectively.
Exclusion of Widely Owned Companies from the Rule
In a bid to provide clarity and streamline implementation, the rule will not encompass investments in companies characterized by widespread ownership and lacking a clear promoter structure. This exclusion emphasizes the regulator’s cognizance of industry intricacies and aims to foster a balanced approach to regulatory compliance.
The regulatory reprieve reflects a concerted effort to address market intricacies while balancing the imperative of regulatory adherence with practical industry complexities. By offering exemptions and extended compliance timeframes, the watchdog aims to navigate the evolving market landscape with informed discernment and foster an environment conducive to foreign investment.
The relief extended to FPIs underscores the symbiotic nature of regulatory frameworks and investor interests, reaffirming the imperative of a balanced and pragmatic approach to market governance. This development augurs well for investor confidence, underpinning the regulatory commitment to aligning operational imperatives with industry dynamics to uphold market integrity.
Sebi’s New Rules for FPIs: No 1 February Cliff
Revised Securities and Exchange Board of India (Sebi) regulations require Foreign Portfolio Investors (FPIs) to make enhanced disclosures. However, it has been clarified that there will not be a sudden change in status for FPIs that have not met these requirements by 1st February.
According to sources, the number of FPIs that are expected to require enhanced disclosures is significantly lower than originally estimated in the consultation paper and the Sebi board note. Certain FPIs, such as sovereign wealth funds, listed companies on specific global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings, have been exempted from the enhanced disclosure requirements.
FPIs that qualified for enhanced disclosures as of 31 October 2023 were given until 31 January 2024 to rebalance their holdings. Should these FPIs continue to meet the criteria for enhanced disclosures by the end of January, they will receive an additional 10-30 days to furnish the required details. Even after this extended period, if they still fail to comply, they will have a further six months to reduce their holdings, as per the second source.
The disclosure rule does not extend to investments in companies with unspecified promoters. Well-known entities such as HDFC Bank Ltd, ICICI Bank Ltd, and ITC Ltd fall under this category with considerable FPI holdings.
Nirmal Jain, the founder of IIFL Group, believes that the regulatory norms should be amended to make them more manageable to comply with over a stipulated timeframe, while retaining their essential characteristics. This clarification from Sebi, according to Jain, will remove one of the “negative overhangs” on the market.
Sebi mandates all listed companies to maintain a minimum public shareholding (MPS) of 25%. Regulators have long been concerned that some promoters attempt to sidestep this rule by investing through FPIs closely associated with them. This issue gained prominence following the Hindenburg report in January 2023, which alleged that some FPIs investing in Adani group companies were linked to the promoters. The Adani Group refuted these allegations.
SEBI’s Enhanced Disclosure Regulations for Foreign Portfolio Investors
In a significant move, the Securities and Exchange Board of India (SEBI) has announced enhanced disclosure regulations for foreign portfolio investors (FPIs) in the Indian market. Following the issuance of a consultation paper in May 2023, the board later approved these regulations in June, marking a pivotal shift in transparency requirements for FPIs operating in India.
Granular Disclosure Requirements
Under the new norms, any fund that holds over 50% of its assets under management in a single corporate entity or more than 25% of assets in the Indian market must provide detailed information on their ultimate beneficial owners (UBO). This enhanced level of disclosure aims to tighten access to the Indian market through participatory notes (P-notes), a popular channel for FPIs seeking exposure.
Implications for Participatory Notes and Market Access
Participatory notes enable funds to access the Indian market through registered FPIs, ultimately issued by another entity. However, the lack of verifiable details about the ultimate owner has raised concerns about the transparency and regulatory oversight of such transactions. With the new regulations, the requirement for granular UBO details aims to discourage attempts to circumvent minimum public shareholding (MPS) norms through P-notes, thereby fostering greater transparency and accountability in the market.
Expert Opinions and Industry Response
Addressing the significance of resolving the UBO issue, Chirag M. Shah, a prominent securities lawyer, emphasized the importance of an early resolution. He advocated for time extensions for compliance and the exemption of entities such as sovereign wealth funds (SWFs) and other entities with a similar pedigree. Moreover, Shah suggested that exemptions should also apply to investors in companies with widespread institutional ownership but lack identifiable promoters.
Market Sentiment and Flow of FPIs
While some market participants have not agreed that the UBO norm deadline significantly impacted FPI flows, the industry’s response to SEBI’s enhanced disclosure regulations underscores the importance of proactive measures to ensure transparency and integrity within the Indian market.
SEBI’s revised regulations for FPIs reflect a concerted effort to bolster transparency and oversight, particularly in the context of participatory notes and market access. By introducing stringent disclosure requirements and addressing the UBO issue, the regulatory body aims to fortify the integrity of the Indian market and uphold the principles of fair and transparent investment practices.
Foreign Portfolio Investors (FPIs) Navigate Volatile Market with Fund Outflows
Renowned financial expert, Shankar Sharma, emphasized the influence of fundamental factors such as earnings on capital flows. He highlighted the average performance of earnings for large caps and dismissed attributing the recent FPI selling to the Ultimate Beneficial Owner (UBO) norms as futile.
The provisional FPI net inflows recorded a negative ₹6,934.93 crore on Wednesday, echoing Sharma’s perspective. The reduction in FPI negative bets on Nifty and Bank Nifty futures—down to 8,556 contracts from 18,829 contracts in a single day—further supported Sharma’s assertion. This shift contributed to the provisional domestic institutional investor (DII) inflows, amounting to ₹6,012.67 crore on the same day. The 50-share Nifty on the National Stock Exchange closed 1% higher, reflecting the market dynamics amidst these capital flows.
In the context of FPI activities, it is noteworthy that after purchasing shares worth ₹1.71 trillion by December 2023, FPIs have divested shares worth ₹19,308 crore in January. This divestment can be attributed, in part, to underwhelming performances by industry leaders like HDFC Bank, Infosys, and Hindustan Unilever. However, the looming deadline estimated to impact ₹2.5 trillion of holdings held by specified FPIs also factored into this dynamic market situation.
Market Volatility and Regulatory Deadline Impact FPI Behavior
Sharma’s commentary sheds light on the complex confluence of factors influencing FPI activity in the Indian market. With fundamental considerations such as earnings playing a pivotal role in shaping capital flows, market participants are keenly observing these dynamics.
The interplay between regulatory deadlines and corporate performance underscores the intricacy of the market landscape. As FPIs navigate these variables, the market continues to exhibit an evolving trend in capital flows amidst the broader economic backdrop.
