Plugging a loophole | The Financial Express

The Securities and Exchange Board of India (Sebi) has sought to correct its past mistake by proposing more disclosures from ‘high-risk’ foreign portfolio investors (FPIs) with large holdings in a single company or a group firm. As the expert committee formed by the Supreme Court in the Adani-Hindenburg case has pointed out, Sebi had made significant changes to its FPI regulations in 2018, which resulted in foreign investors not disclosing their ultimate beneficiary, even though at least one large corporate house was found guilty of round-tripping through the stock market and using related entities in offshore tax havens to manipulate stock prices in domestic markets. After huge uproar from large FPIs, Sebi had removed the requirement to disclose the natural person who was the last beneficial owner of an FPI.

According to a Sebi consultation paper on Wednesday, such FPIs and all their linked entities will have to reveal granular details of ownership, economic interest, or control rights on a full “look-through” basis, up to the level of all natural persons and/or public retail funds or large public listed entities. Sebi estimates that Rs 2.6 trillion worth of foreign funds would need to make such disclosures, which is about 6% of the total foreign investor flow in Indian equities.

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The real reason for Sebi’s move is obvious as it follows criticism about the lack of oversight over inflows in conglomerates like the Adani Group. There were reports that a few FPIs had parked a substantial part of their corpuses in stocks of the Adani Group. Then came US short-seller Hindenburg’s damning allegations against the group, none of which has been proved and has been strongly refuted by the group. There is yet another reason that may have prompted Sebi’s proposal for a new set of rules to track the ‘last natural persons’ or the ultimate beneficial owners in an FPI. The Financial Action Task Force (FATF), a global body to combat money laundering, will review India in November this year, and any adverse comments by FATF can impact FPI inflows.

Whatever the reason, Sebi’s proposal must be welcomed in the interest of transparency as it is aimed at preventing possible circumvention of minimum public shareholding requirements and potential misuse of the FPI route to guard against the inherent risks of “opportunistic takeover of Indian companies”. Extant rules are necessary as many jurisdictions have been unwilling to reveal granular data in the absence of any specific charges of wrongdoing against the FPIs. Some have even termed Sebi’s demands for details as “fishing” queries.

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The only point is while the intention is good, execution may be a huge problem. The onerous rules may not go down well with many FPIs as they are hesitant to share sensitive data with institutions in a country where a data privacy law is forever in the works. The effectiveness of the proposals ultimately depends on dedicated action rather than mere provisions, as a decade of enforcement against FPIs has revealed. Experts have also pointed out that the implementation of the proposals would require inapplicability of secrecy or privacy laws of offshore jurisdictions where investors are situated, which will be a challenge. It could also push many foreign investors to take the route of participatory notes, which are offshore derivative instruments issued by FPIs to foreign investors who want to bet on Indian equities without registering themselves with Sebi.