Introduction:
The Foreign Portfolio Investor (“FPI”) regime is a foreign investments’ entry route in India, whereby FPIs can invest in Indian securities, subject to compliance with India’s foreign exchange control laws and the regulatory framework issued by the Securities and Exchange Board of India (“SEBI”). As part of the Know Your Customer (“KYC”) process for FPI registration, identification and verification of Beneficial Owner(s) (“BO”) is required to be undertaken as per Rule 9 of the Prevention of Money Laundering (Maintenance of records) Rules, 2005 (“PMLR”),[1] which is a part of the Indian AML/ CFT legal framework.
PMLR Criteria for Identifying BOs:
Quantitative Criteria: BOs are identified basis material percentage threshold of ownership and economic interests:
- 10% in case of companies; and
- 15% in case of trusts and partnerships.
Control Criteria: BOs are also identified on the basis of control, which includes the right to appoint majority of the directors or to control management or policy decisions.
Furthermore, where no natural person is identified as BO by ownership or control, FPIs are required to identify senior managing official (“SMO”) as BO.
SEBI’s Concerns:
The changes brought about by SEBI with respect to the BO disclosure framework by FPIs began on May 31, 2023, when SEBI released a Consultation Paper, detailing the requirement of additional disclosure by FPIs that fulfil certain criteria, to prevent possible circumvention of minimum public shareholding[2] (“MPS”) and/ or compliances under SEBI’s takeover regulations for direct or indirect acquisition of shares or control over listed companies and/ or misuse of the FPI route to circumvent Press Note 3, dated April 17,[3] (“PN3”), based on the following observations made by SEBI:
- concentrated and substantial FPI investments in a single Indian company, which were near static and maintained for a long time;
- often no natural BO is identified based on economic interests by applying the PMLR parameters, and in many cases the SMO is identified as BO instead of the actual BO;
- same natural person may hold significant economic interest in the FPI via various investment entities (each of which may be below the prescribed BO threshold of 10% under PMLR); and
- the restrictions under PN3 on investments from countries sharing land borders with India that do not apply to FPI investments.
Additional BO Disclosure Requirements:
To address the concerns detailed above, in its Board Meeting on June 28,2023, SEBI approved the requirement for additional BO disclosures by FPIs that fulfil certain criteria, which were implemented by way of a circular on August 24, 2023 (“August 2023 Circular”), prescribing that FPIs fulfilling the following criteria should provide granular details of all entities holding any ownership,[4] economic interest,[5] or exercising control[6] in the FPI, on a full “look through” basis, up to the level of all natural persons, without any threshold;
- FPIs holding more than 50% of their Indian equity Assets Under Management (“AUM”) in a single Indian corporate group; or
- FPIs that individually, or along with their investor group,[7] hold more than INR 25,000 crore (USD 15 billion) of equity AUM in Indian markets.
Exceptions Provided:
An exception from the new granular BO disclosure obligations under the August 2023 Circular has been provided to:
- Government and government related investorsregistered as FPIs, public retail funds[8] (subject to independent validation by Designated Depositary Participants;
- Exchange traded funds (with less than 50% exposure to India and India-related equity securities);
- Entities from certain jurisdictions and exchanges (e.g. NASDAQ, NYSE, LSE, etc.);[9]
- FPIs with pooled structures and wide investor bases.
In respect of the new BO disclosure obligations under the August 2023 Circular,[10] basis feedback from the Industry, SEBI noted that for listed companies without any identified promoter, the entire shareholding is classified as ‘public’ and there would be no risk of circumvention of MPS requirements.
Accordingly, on March 15, 2024, SEBI issued a circular providing an additional exemption to FPI’s having more than 50% of their Indian equity AUM in a corporate group from the granular BO disclosure obligations under the August 2023 Circular, subject to compliance with all of the following conditions;
- the apex company of such corporate group has no identified promoter;
- the FPI holds less than 50% of its Indian equity AUM in the corporate group, after disregarding its holding in the apex company (with no identified promoter); and
- composite holdings of all such FPIs (that meet the 50% concentration criteria excluding FPIs that are either exempted or have disclosed) in the apex company is less than 3% of the total equity share capital of the apex company (to mitigate the risk of circumvention of takeover regulations).
Implications and Way Forward:
The strict implications of non-compliance with SEBI’s granular BO disclosure norms involve invalidating (and eventual surrender) of the non-compliant FPI’s registration, as well as:
- prohibition from further purchases;
- liquidation of its FPI holdings and;
- an exit of the FPI from the Indian securities market within 180 days.
FPIs are encouraged to implement robust internal mechanisms to monitor concentration of FPI holdings to avoid triggering the granular BO disclosure obligations, and to realign portfolios within the grace period of 10 trading days in case of any breach of thresholds triggering the granular BO disclosure obligations under the August 2023 Circular.
[1] Paragraph 4(i) to Part-B of SEBI’s Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated December 19, 2022.
[2] In terms of Rule 19A(1) of the Securities Contracts (Regulation) Rules, 1957, listed companies are required to maintain a sminimum public shareholding of 25% at all times.
[3] The Government of India issued PN3 requiring an entity of a country that shares land border with India, or where the BO of an investment into India is situated in or is a citizen of any such country, to invest only under the Government route.
[4] ‘Ownership interest’ means ownership of shares or capital of the entity or entitlement to derive profits from the activity of the entity.
[5] “Economic interest’ means returns from the investments made by the FPI.
[6] ‘Control’ includes “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner”. [Reg 2(f) of the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”)]
[7] ‘Investor Group’ means: “multiple entities registered as foreign portfolio investors and directly or indirectly, having common ownership of more than fifty per cent or common control, shall be treated as part of the same investor group and the investment limits of all such entities shall be clubbed at the investment limit as applicable to a single foreign portfolio”. [Reg. 22(3) of the FPI Regulations]
[8] ‘Public Retail Funds’ means “(i) mutual funds or unit trusts which are open for subscription to retail investors and which do not have specific investor type requirements like accredited investors; (ii) insurance companies where segregated portfolio with one to one correlation with a single investor is not maintained; and (iii) pension funds”.
[9] Per Annexure A to SEBI Circular dated November 28, 2019 on “Framework for issue of Depository Receipts”.
[10] Consultation Paper dated February 27, 2024 on proposals to improve ease of doing business with respect to the additional disclosure framework for FPIs.
