Why in News:

The Securities and Exchange Board of India (SEBI) has put forth a consultation paper suggesting the implementation of a new framework that mandates additional disclosures from Foreign Portfolio Investors (FPIs). This measure particularly targets FPIs with concentrated single group exposures or significant overall holdings in their equity investment portfolios.

Important Points:

  • Some FPIs have been observed to hold a substantial portion of their equity portfolio in a single company or company group, with these concentrated holdings remaining static for extended periods.
  • SEBI is concerned that such concentrated investments may be an attempt by corporate groups’ promoters or other investors acting together to circumvent regulatory requirements like maintaining Minimum Public Shareholding (MPS).
  • The proposed enhanced transparency measures aim to identify all holders of ownership, economic, and control rights for objectively identified high-risk FPIs to prevent potential misuse of the FPI route.

Categorizing FPIs:

  • The consultation paper proposes the categorization of FPIs into high, moderate, and low risk. Only government and government-related entities, such as central banks, sovereign wealth funds, pension funds, and public retail funds, will be considered low risk FPIs.
  • The proposed disclosures will not be limited by any materiality thresholds set by the Prevention of Money Laundering Act (PMLA) rules and FPI regulations.
  • FPIs with over 50% of their equity Asset Under Management (AUM) in a single corporate group would be classified as high-risk and required to comply with additional disclosure requirements.
  • FPIs with exposure below 25% of their overall AUM at a scheme level in a single India/ India-related corporate group may be reclassified as moderate risk and thus exempt from additional disclosure requirements.
  • New FPIs will be allowed to cross the 50% group concentration threshold within six months without additional disclosures. However, beyond six months, crossing this threshold will trigger the need for additional disclosures.
  • Existing FPIs in the process of winding down their investments can temporarily breach the 50% investment threshold in a single corporate group, provided their portfolio is wound down within six months.
  • Existing high-risk FPIs with over 50% concentration in a single corporate group will have six months to bring down this exposure below 50% before additional disclosure requirements take effect.
  • Existing high-risk FPIs with an overall holding in Indian equity markets exceeding Rs 25,000 crore must comply with additional granular disclosure requirements within six months. Failure to do so will require the FPI to reduce its AUM below the threshold.
  • High-risk FPIs crossing the Rs 25,000 crore AUM threshold in the future will have to comply with additional granular disclosure requirements within three months, failing which they must bring down their AUM below the threshold within the given time frame.

About SEBI:

  • SEBI was initially constituted as a non-statutory body on April 12, 1988, and later established as a statutory body in 1992 through the Securities and Exchange Board of India Act, 1992 (15 of 1992).
  • Its objectives include investor protection, prevention of fraudulent practices in trading and stock exchange activities, development of a code of conduct for financial intermediaries, and maintaining a balance between statutory regulations and self-regulation.
  • SEBI functions to protect Indian investors in the securities market, promote the smooth functioning of the securities market, regulate business operations in the securities market, educate investors, prohibit fraudulent practices, monitor company takeovers, and keep the securities market efficient and up-to-date.

Powers of SEBI

Quasi-Judicial Power:

  • SEBI India possesses the authority to pass judgments in cases of fraud and unethical practices occurring in the securities market.
  • This power ensures transparency, accountability, and fairness in the securities market.

Quasi-Executive Power:

  • SEBI has the ability to examine the Book of Accounts and other crucial documents to identify or gather evidence against violations.
  • Upon discovering violations of regulations, the regulatory body can impose rules, pass judgments, and take legal actions against the violators.

Quasi-Legislative Power:

  • In order to safeguard the interests of investors, SEBI has been entrusted with the power to formulate relevant rules and regulations.
  • These rules cover various aspects such as listing obligations, insider trading regulations, and essential disclosure requirements.
  • SEBI formulates rules and regulations with the aim of eliminating malpractices in the securities market.

Supreme Court and Securities Appellate Tribunal Oversight:

  • The powers and functions of SEBI are subject to the authority of the Supreme Court of India and the Securities Appellate Tribunal.
  • Both apex bodies have the final say in all matters pertaining to SEBI’s functions and related decisions.

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