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SEBI Proposals For FPIs: Experts Raise Jurisdictional, Enforcement Concerns

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There are data privacy concerns and logistical issues with SEBI’s proposal for FPIs, say experts.

Narrow categorisation, operational issues, and jurisdictional challenges are some of the key concerns that experts have raised on the recent SEBI proposals for foreign portfolio investors.

Broadly, the Securities and Exchange Board of India wants to enhance disclosures for certain types of FPIs. To that end, the regulator has proposed a risk-based categorisation.

Sovereign wealth funds and other government-related entities fall into the low-risk category. Pension funds and public retail funds are part of the moderate-risk category. All others fall under the high-risk category.

For the high-risk category, SEBI has proposed disclosure of information about the ownership, economic interest, and control of the FPI at a granular level. This disclosure, according to the proposal, will need to be made by FPIs that have 50% of their investments concentrated in a single corporate group or company, or those who have an overall holding of over Rs 25,000 crore in the Indian market.

The risk-based categorisation is too narrow in the current form, according to Shruti Rajan, partner at Trilegal. Even regulated entities, listed companies which are FPIs, will now fall into a high-risk category, she said.

FPIs with robust governance policies that are otherwise well-regulated or have listed parentage shouldn’t be subject to additional disclosure requirements. – Shruti Rajan, Partner, Trilegal

It’s a good starting point, though, said Manshoor Nazki, partner at IndusLaw. In his view, the classifications are an indication of future regulation. There are strong indications in the consultation paper that even FPIs that are not “high risk” might eventually have to make some additional disclosures, Nazki said.

This is evident from, one, if only “high risk” FPIs were supposed to disclose information, what was the need to create three categories and not just two? Second, SEBI itself has admitted that currently only around 6% of the total FPI equity AUM will be high risk, which also suggests that more FPIs might eventually come under the purview of this proposed framework. – Manshoor Nazki, Partner, IndusLaw

The second concern revolves around potential operational difficultiesโ€”structuring investments to avoid disclosure, reliance on FPIs themselves for compliance, and the granular information SEBI expects from them.

The threshold can be avoided by parties by spreading their investments across various FPIs while ensuring the threshold of 50% exposure in a single group is not crossed and the fund size remains below Rs 25,000 crore, said Sumit Agarwal, partner at Regstreet Law Advisors.

It may also impact existing FPI holdings in the market, Agarwal said.

High-risk FPIs that momentarily breach the 50% group concentration investment threshold will be provided 10 days to reduce such concentration before the additional disclosure requirements become effective, the proposal said.

The proposal to compulsorily reduce corpus on violations might force certain big FPIs to sell as they might not be able to obtain all the details required at a granular level, considering the complicated legal structure of certain entities spread across various jurisdictions, Agarwal said.

According to Nazki, FPIs are typically very reluctant to share details about the ultimate holders of economic interest. SEBI would have to rely on FPIs for compliance with these proposed requirements, given its limited ability to source the information from anywhere else, he said.

Rajan said that the proposals are silent on what kind of granular information the regulator wants from the ultimate beneficial owners. One can understand why SEBI has to leave this a bit open-ended and give itself flexibility, but some guidance will be useful, she said.

Will it merely require the name of the natural person exercising control, bank records, government identification, or whether it intends banks to undertake a detailed KYC? – Shruti Rajan, Partner, Trilegal

Finally, the regulator may also run into jurisdictional issues.

“These requirements can be challenged by entities located in other jurisdictions as violative of their local laws as well as their right to privacy,” said Agarwal.

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