SEBI had, vide its Circular dated August 24, 2023 (“August Circular”), laid down norms for FPIs/investor groups with assets under management (“AUM”) exceeding INR 25,000 (twenty five thousand) crore (“Size-based Criteria”). These norms require furnishing granular details[1] of all their investors/stakeholders on a look-through basis to ascertain if the FPI is effectively domiciled in a Land Bordering Country (“LBC”) or not. Subsequently, SEBI in its consultation paper dated July 30, 2024, (“Consultation Paper”) has proposed to replace the Size based Criteria with a “risk-based criteria” depending upon the participation of investors from “land bordering countries”. In addition to providing an overview of the extant laws, this blog covers the roadblocks emerging from the August Circular, SEBI’s proposal in the Consultation Paper, and its implications.
Overview of the extant laws and the existing roadblocks for FPIs
The August Circular required FPIs to disclose on a full look through basis, without any threshold, the granular details of all entities holding any ownership, economic interest, or control in an FPI if they met any of the below-mentioned criteria:
- “holding more than 50% (fifty percent) of their Indian equity AUM in a single Indian corporate group (“Concentration Criteria”); or
- individually, or along with their investor group (in terms of Regulation 22(3) of the FPI Regulations), hold more than INR 25,000 (Indian Rupees twenty-five thousand) crore of equity AUM in the Indian markets (Size-based Criteria).”[2]
The Consultation Paper clarifies that the above-mentioned additional disclosures by FPIs breaching the Size-based Criteria were mandated with the aim to illuminate and categorize FPIs as LBC entities or Non-LBC entities, for appropriate monitoring by the concerned authorities.
However, SEBI had identified several roadblocks (during deliberations and interactions with industry participants) in relation to the additional disclosures. SEBI observed that very large non-exempt funds (having an extensive and diversified investor base) have breached the Size-based Criteria and are, therefore, subject to additional disclosures requirements thereby mandating such FPIs to undertake cumbersome compliance exercise. SEBI has now proposed the following ‘risk-based criteria’ to categorize FPIs into LBC entities and non-LBC entities:
- “If the entities owning/controlling/holding economic interest in more than 50% (fifty percent) of the AUM of the FPI are from LBC, the FPI shall be categorized as an LBC entity and further granular disclosures shall not be required.
- If the entities owning/controlling/holding economic interest in more than 67% (sixty seven percent) of the AUM of the FPI are from non-LBC, the FPI shall be categorized as non-LBC entity and further granular disclosures shall not be required. This higher requirement to specifically identify non-LBC beyond 50% (fifty percent) is to ensure that any LBC holding or influence in the FPI, if at all, would be below 33% (thirty three percent), and hence have lesser significance.
- If the above-mentioned thresholds are not met, the FPI shall be required to disclose granular details of all entities owning/controlling/holding economic interest in the FPI. However, categorization of the FPI shall be made on the basis of disclosures made by the FPI considering the country/nationality of entities owning/ controlling/ holding economic interest in majority [i.e. more than 50% (fifty percent)] of AUM of the FPI.”[3]
It may also be noted that as per the extant provisions of the August Circular, in case of entities meeting any exemption criteria specified under the August Circular, disclosure of granular details shall not be necessary.[4] Therefore, for the purpose of identification and categorisation as LBC or non-LBC, the holdings of the exempted intermediate entities shall be taken as per the country/nationality of the intermediate entity.
The Consultation paper further proposes that the identification of FPI as LBC or non-LBC entity should be on the basis of verification of actual disclosures by the DDPs and not on mere declarations. The aforesaid proposals are only for dealing with breach of the Size-based Criteria. There is no proposal to change the extant framework for dealing with breach of the Concentration Criteria.
The Consultation Paper seems to be a step in the right direction since the Size-based Criteria may inadvertently trap unintended cases under the enhanced compliance obligation to disclose granular details of underlying investors and, therefore, merits a re-consideration. Readers are encouraged to provide feedback to SEBI on the Consultation Paper by August 20, 2024 through the following link.
[1] For granular details, please refer to Annexure A of the standard operating procedures contained in the following links: link 1 and link 2.
[2] For further details, please refer to paragraph 1 (xiii) (Part-C) of the SEBI master circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated May 30, 2024.
[3] For further details, please refer to the Consultation Paper.
[4] FPIs satisfying any of the criteria listed below are exempted from disclosing granular level details:
- Government and Government related investors registered as FPIs.
- Public Retail Funds
- Exchange Traded Funds
- Pooled investment vehicles registered with/ regulated by a Government/ regulatory authority in their home jurisdiction/ country of incorporation/ establishment/ formation.
- FPIs that are unable to liquidate their excess investments due to statutory restrictions till the time such restrictions exist.
- Newly registered FPIs.
- FPIs having intimated to their DDP about their intention to surrender their FPI registration.
For more details, please refer to paragraph 1 (xiv) (Part-C) of the SEBI master circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated May 30, 2024.
