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[Mr. Harsh Pati Tripathi and Mr. Satvik Sanskritayan are 5th Year B.A., LL.B. (Hons.) students at NALSAR University of Law, Hyderabad]


The Securities and Exchange Board of India (SEBI) has released a consultation paper on 31st May 2023 that mandates certain “high-risk” Foreign Portfolio Investors (FPIs) to make additional granular disclosures. This is intended to prevent any circumvention of the Minimum Public Shareholding (MPS) norm and guard against potential violation of the Press Note 3 that prescribes rules for Beneficial Owners (BOs) situated in countries that share land borders with India.

The move by the regulatory body comes in light of the Justice Sapre Expert Committee report released by the Supreme Court on Adani-Hindenburg allegations that states how SEBI drew a blank trying to find the Ultimate Beneficial Owners (UBOs) of 13 funds invested in Adani stocks due to legislative limitations. While the consultation paper is a right step towards settling the long-standing issue of finding UBOs and ensuring transparency, the authors argue that certain proposals in the paper are ambiguous and will be difficult to enforce. The regulatory body needs to take into account these limitations before notifying any regulations.


In order to appreciate the relevance and need for regulations on the issue, it is imperative to note the series of developments leading up to the present consultation paper. The first significant FPI Regulation came out in 2014. It included an ‘opaque structure’ clause that essentially meant any structure such as segregated cell company, protected cell company, etc. where it was not possible to determine the UBOs, or the BOs were ring-fenced with each other. Such entities were required to fulfil certain conditions before being eligible for registration as FPI. This included the stipulation that there would exist no presumption of an opaque structure, if SEBI can be assured through an undertaking that the FPI would provide the requisite details of the UBO as and when SEBI sought it. In 2018, SEBI notified a new set of regulations stating that “ultimate beneficial owner” would have the same meaning as that of “beneficial owner” as defined in Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules 2014 (PMLA Rules). Consequently, in May 2019, the Harun R Khan Committee Report recommended that “opaque structure” clause be removed relying on the sufficiency of Rule 9 of the PMLA Rules.

This removal of ‘opaque structure’ provision by SEBI in the 2019 FPI regulations turned out to be a stumbling block for the regulatory body while investigating the Adani-Hindenburg allegations. The same was stated in the Justice Sapre Expert Committee Report released by the Supreme Court enquiring the Adani-Hindenburg allegations. The report said that SEBI drew a blank and hit the ‘opaque structure’ wall during its investigations as the requirement to disclose every natural person by the FPI was done away by SEBI in 2018.

This series of events has led the regulatory body to release this consultation paper requiring certain high-risk FPIs to make additional granular disclosures.

Issues with Enforcement

The consultation paper is indeed a necessary step in the right direction towards ensuring transparency. However, the authors argue, that it will be difficult for the regulatory body to enforce certain provisions. The paper is not bereft of loopholes and ambiguous provisions that may have certain unintended consequences.

The consultation paper requires existing high-risk FPIs that have more than 50% holding in a single corporate group to bring down such exposure within a period of 6 months. It also allows new FPIs the flexibility to cross the 50% threshold for a maximum time frame of 6 months before the requirement to make additional disclosures kicks in. It is argued that this period is too long, and it will allow the FPIs to circumvent the intent of this provision. The FPIs can create new funds (that would have 6 months flexibility) and pass on the excess investment over the 50% threshold to this new fund. For instance, if an FPI has 70% Asset under Management (AUM) in a single corporate group, it can create a new fund and pass 21% of this AUM to the new fund which will exempt it from making additional disclosures. Thus, the FPIs that have violated the MPS norm, or the Press Note 3 norm cannot be nabbed through this provision.

Another proposal in the paper says that while the primary responsibility of maintaining concentration and size thresholds rests with the FPI, any breach in the threshold and consequential rectification of the same shall be the responsibility of the Designated Depository Participants (DDPs). On the part of DDP, this would entail not only obtaining the details of the UBO/listed company/fund, but also an obligation to ascertain economic interest or control. This poses a significant problem as such aspects could be dealt through private arrangements of the FPIs. The DDPs are limited to legal ownership and have no means to scrutinize such private arrangements. Thus, there is a scope of deliberate informational gap between the FPIs and DDPs that can be created by FPIs to escape the disclosure liabilities.

This potential of informational lacuna between FPIs and DDPs leads to another concern. The consultation paper requires on part of the existing high-risk FPIs with an overall holding of over 25 thousand crores in Indian equity markets to disclose any “material change” regarding any ownership, economic interest, or control rights to the DDPs within 7 days. However, there is no defined ambit of the term “material change”, and it will be up to the discretion of the FPIs to decide what change they find “material” enough to be conveyed to the DDPs. Also, given such high equity holding, such FPIs may include hedge funds and soft banks that have complicated investor structure. Requiring such entities to disclose any change in the structure such as details of all investors, transactions of the shares, etc. within an extremely short duration of just 7 days is tedious and may lead to disruptive outcomes. It may result in withholding of crucial information by the FPIs, and it will be onerous to impose liability in such cases.

There are other proposals in the paper that may also face the wall of enforcement limitations. One of the suggestions requires high-risk FPIs to make additional disclosures notwithstanding “secrecy laws that may be applicable in other jurisdictions of their domicile”. While SEBI is certainly within its legislative prerogative to demand such compliances, it is yet to be seen how such conflicting interests will play out. It will not be a stretch to state that such requirements may adversely affect Ease of Business and inhibit potential investments. Furthermore, the paper also stipulates that no materiality thresholds should be applied for the identification of UBOs. Such non-insistence raises doubts over the very relevance of materiality tests, and what impact the same would have over the identification mechanism will have to be seen in due course.

Concluding Note

Despite the aforementioned loopholes and ambiguities, the consultation paper is a necessary step towards addressing the ownership concerns of FPIs that has bothered SEBI for the past several years. The Adani crisis has certainly triggered the debate once again as the limitations of the existing regulations were underscored by the expert committee report. As mentioned in the report, SEBI ‘drew a blank’ despite all the efforts to investigate any foul play. The present consultation paper is a result of these events and is a much-needed step in the direction of ensuring transparency. However, given the implementational blockades that SEBI might face, it is imperative for the regulatory body to take into account such potential gaps in the paper before bringing out the final regulations.

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