The recent consultation paper by the Securities Exchange Board of India ("SEBI") mandating additional disclosures from Foreign Portfolio Investors ("FPIs") has been in the news since its promulgation. The concern is mostly with respect to the drawbacks it shall have on the prospects of investments in the country from outside investors and whether it will make the home country an unappealing destination for investment transactions in home-grown companies. It is however felt that the focus of this consultation paper is on the need for such additional disclosures which mainly intend to tap the identified FPIs which are high in risk in relation to their equity being concentrated in a single entity or group of entities and does not wish to tap all the FPIs.

Potential Issues

It is stated by SEBI that this need stems ideally from two potential issues: -

i. Identification of Beneficial Owners (BO) of legal entities for maintaining Minimum Public Shareholding ("MPS"); and

ii. Potential Circumvention of the Press Note 3, promulgated on 17th April 2020.

The general obligations and responsibilities of FPIs as cast under the Securities Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 ("FPI Regulations") require the FPIs to provide any information or documents including beneficiary ownership details of their clients as may be required by SEBI or the Designated Depository Participant ("DDP"). This obligation on the FPIs has been built in consonance with the requirements under the Prevention of Money Laundering Act, 2002 ("PMLA") and rules made thereunder.

SEBI applies the same principle enshrined under Rule 9 of PMLA for identification of the BOs, however, the identification of the natural person as the BO of the FPIs based on economic interest proves to be an idle exercise since the investors of FPIs is usually below the threshold as prescribed under Rule 9 of PMLA. This being the scenario, the DDP is unable to determine the last thread of the natural person being identified as a BO.

It was therefore through this consultation paper, SEBI highlighted certain additional disclosures to circumvent the issues relating to the identification of the BOs, thereby inviting public comments on the need for such additional requirements.

Proposed Resolution

It is recommended by SEBI that identification of the issues and the need to preserve the intention of the legislation requires the following proposed resolutions: -

i. Identification of Beneficial Owners (BO) of legal entities for maintaining MPS: -

a. At the time of registration, at the first level, there is proposed to be a further categorization as high, moderate and low risk-based criteria, wherein the low-risk FPIs have been designated to government and government related entities, the moderate risk is designated to pension funds and public retail funds and high risk is all other FPIs which are not low or moderate risk FPIs.

b. SEBI further intends to provide further categorization with respect to the concentrated investments in a single group and size of overall equity Asset under Management ("AUM").

c. It is proposed that if the holding in a single corporate group goes beyond 50 percent of their equity AUM, will be required to provide granular data of all entities with any ownership. economic interest or control rights which will be assessed on a full look through basis until all the natural person BOs are identified at the end of the chain. Any change in the structure will require intimation to the DDPs within 7 (seven) days.

d. SEBI also provides the need for existing high-risk FPIs to bring down the 50 percent concentration threshold in a single corporate group within the period of 6 (six) months, prior to the requirement of mandating the additional disclosure requirements by SEBI.

e. SEBI continues to state in its paper that the failure to abide by the additional requirements as and when becoming effective, shall render the registration of the FPIs invalid and shall be wind down within 6 (six) months.

ii. Potential Circumvention of the Press Note 3, promulgated on 17th April 2020.

a. It is proposed that if the overall holding in the Indian equity market goes beyond 25,000 crores the existing high risk FPIs will be required to provide granular data of all entities with any ownership, economic interest or control rights which will be assessed on a full look through basis until all the natural person BOs are identified at the end of the chain. Any change in the structure will require intimation to the DDPs within 7 (seven) days.

b. SEBI also provides the need to bring down the 25,000 crores AUM within 3 (three) months of the promulgation of the direction by SEBI or abide by the additional disclosures as stated by SEBI within 3 (three) months of SEBIs directions coming into force.

SEBI further necessitates the requirement of providing an undertaking by identified high risk FPIs at the time of registration, wherein they shall confirm having a suitable mechanism/agreement in place with their investors for a full look through exercise to determine the last thread of identifying the BOs to be provided to their DDPs. It is intended that such mechanism/agreement shall include waiving off the privacy rights of such investors in favour of SEBI to give effect to this proposed resolution.

Conclusion

SEBI brought out Press Note No. 3 (2020 Series) on 17th April 2020 to curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic. It was however felt that for protecting the Indian companies, there has to be an established principle wherein the end line for identifying the BOs becomes effective, which will be determined as per the two thresholds of 50 percent group concentration or 25,000 crores fund size. This will stabilize the need for identification of the BOs, if such BOs are based out of the land-sharing borders requiring them to invest only through the government route. At the same time, SEBI protects the regulatory aspects of maintaining the MPS, vide this consultation paper.

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