The Securities and Exchange Board of India (SEBI), in its latest consultation paper, has sought additional disclosures about ownership details from high-risk foreign portfolio investors (FPIs) in an effort to plug a gap in the Prevention of Money Laundering Act (PMLA) as well as the existing FII regulations. The market regulator is looking to mandate full identification of ownership, economic interest, and control rights of high-risk FPIs. 


"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 Foreign Portfolio Investors (FPIs) that have either concentrated single group exposures and/ or significant overall holdings in their India equity investment portfolio," the objective of the SEBI's Consultation Paper read. 

 

 the SEBI aims to enforce stricter ownership disclosure norms for high-risk FPIs, requiring the identification of all stakeholders including natural persons, public retail funds, and large listed corporates, without applying any materiality thresholds, equivalent Prevention of Money Laundering Act (PMLA), or secrecy laws applicable in other jurisdictions. The focus is on FPIs with concentrated single-group exposures or significant overall holdings in their Indian equity portfolio.

"On the surface, any enhanced disclosure requirements may appear to detract from ease-of-doing investments. However, there can be no sustained capital formation without transparency and trust," the Sebi has said in the paper.


The regulator has proposed categorisation of FPIs based on risk. The government and related entities such as central banks, sovereign wealth funds have been categorised as low-risk while pension funds and public retail funds are placed under moderate risk. All other FPIs have been called high-risk. High-risk FPIs holding more than 50 per cent of their equity asset under management (AUM) in a single corporate group would be required to comply with the requirements for additional disclosures.


"Such concentrated investments raise the concern and possibility that promoters of such corporate groups, or other investors acting in concert, could be the FPI route for circumventing regulatory requirements such as that of maintaining minimum public shareholding (MPS),” said the SEBI.


The regulator has suggested a requirement for high-risk Foreign Portfolio Investors (FPIs) who possess 50 per cent or more of their equity assets under management in a single corporate entity to provide additional disclosures regarding the ownership, economic interest, and control of such funds. These disclosures will need to extend to all natural persons involved, as well as public retail funds or large public listed entities. Similar disclosure obligations have been proposed for FPIs with an overall holding exceeding Rs 25,000 crore in the Indian equity markets.


However, some threshold relaxation has been proposed for global entities with higher AUMs and for newly-established FPIs for the first six months.


Currently, the Prevention of Money Laundering Act (PMLA) norms require the identification of beneficial owners (BO) of legal entities based on specific thresholds. However, in the case of Foreign Portfolio Investors (FPIs), no natural person is typically identified as the BO as investor entities often fall below the prescribed threshold. This has posed challenges for SEBI in determining the ultimate beneficial owners, natural persons with economic interest, or contributors of FPIs. 


The regulator has sought public comments on the proposal by June 20. 


In 2018, the Prevention of Money Laundering (PML) Act revised the definition of the ultimate beneficial owner, considering the beneficial owner as the ultimate beneficial owner. Subsequently, in 2019, the SEBI removed the requirement for mandatory disclosure of ultimate beneficial owners. At that time, foreign entities were only obligated to provide details of the senior managing official and were not required to disclose their stakeholders or contributors to the SEBI.


The PML Rules establish thresholds based on ownership or entitlement to capital or profits (economic interest) to determine the beneficial owner of legal entities. These thresholds are set at 10 per cent for companies and trusts, and 15 per cent for partnerships. Additionally, the rules specify that the beneficial owner includes natural persons who exercise ultimate effective control over a legal entity or arrangement.