India’s capital markets regulator proposes to seek more disclosures from foreign funds with large holdings in local stocks or companies, following criticism about lack of oversight over inflows into sprawling conglomerates such as the Adani Group.
The Securities and Exchange Board of India in a consultation paper Wednesday defined ‘high-risk’ foreign portfolio investors and said these funds must comply with additional disclosure requirements within six months after the norms are implemented. Comments are invited through June 20.
The funds would need to submit ownership details including who holds economic interest and control rights. The proposed changes would impact a total 2.6 trillion rupees ($31.5 billion) of FPI assets under management in India, or about 6% of such inflows in the country.
“Some FPIs have been observed to concentrate a substantial portion of their equity portfolio in a single investee company,” Sebi said. “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” to bypass regulations and manipulate stock prices, the regulator added.
The proposals follow a report by US short-seller Hindenburg Research, which had led to criticism that Sebi didn’t do enough to track who ultimately owns the cash flowing from Mauritius-based funds into Adani companies. The conglomerate had at one point lost more than $100 billion of its market value following the allegations, which it has repeatedly denied.
Hindenburg had alleged that a web of foreign funds mainly based in tax havens — with murky ownership details — had been investing in Adani companies, pumping up stock prices and allowing billionaire Gautam Adani more room for leverage. Adani has denied the allegations and a committee appointed by India’s Supreme Court said in an interim report it doesn’t see regulatory failure or signs of price manipulation in the rise and fall of the Adani stocks.
Some more details from the Sebi paper:
- Sebi defines government-owned and related funds as low risk; pension or public retail funds are medium-risk; all others are high-risk
- For now, high-risk FPIs holding more than 50% of their equity asset under management in a single corporate group, or those with overall holding in Indian equity markets of more than 250 billion rupees would have to comply with the requirements for additional disclosures
- The funds would have to submit “granular data of all entities with any ownership, economic interest, or control rights on a full look –through basis, up to the level of all natural persons and/or Public Retail Funds or large public listed entities”
- Failure to make such disclosures within the stipulated time could lead to deregistration of the FPI (in case of concentrated holdings) and or other regulator action (for large AUM funds).
“While the move appears in line with higher transparency, it will pose an enforcement challenge as private agreements could still obscure full details from the depository participant obliged to get the FPI information,” said Sandeep Parekh, managing partner at Mumbai-based Finsec Law Advisors, which specializes in securities law.
--With assistance from Ashutosh Joshi and Menaka Doshi.
