Explained | Why is the markets regulator asking for more disclosures from foreign portfolio investors?

The story so far: On May 31, markets regulator the Securities and Exchange Board of India floated a consultation paper that proposed additional disclosures from Foreign Portfolio Investors. As per the regulator, the objective is to “enhance trust in the Indian securities markets by mandating additional granular disclosures around ownership of, economic interest in, and control of objectively identified high-risk FPIs” that have either concentrated exposures to a single group and/or significant holdings by means of equity investments in India. The two broad issues that prompted floating of the proposed regulation in the consultation paper are: potential misuse of the FPI route for circumventing Press Note 3 stipulations and concentrated group investments by foreign portfolio investors endeavouring to bypass regulatory requirements. SEBI observes, “Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be using the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding.” This would entail that the suggested free float, or the shares available in the open market for public trading without restrictions,, may not actually be correct. SEBI has observed that, while under FPI regulations, details about the beneficial owner based on control or fund ownership have been made available, “it is often observed that no natural person is identified as the beneficial owner of FPIs based on economic interest, since each investor entity in the FPI is generally found to be below the threshold prescribed under PML rules.” The proposed legislation categorises FPIs into low risk, moderate risk and high risk.