Sebi's new disclosure norms likely to impact few FPIs due to exemptions

Approximately 20% of foreign portfolio investors (FPIs) breaching SEBI's specified thresholds will need to provide detailed disclosures on ultimate beneficiaries, owing to certain exemptions, sources indicate. FPIs with over 50% holdings in a single corporate group or over Rs 25,000 crore exposure to Indian assets must disclose ultimate beneficial ownership (UBO) starting February 1. Depending on their category, FPIs will have 10-30 working days to submit these details, followed by an additional six months to exit holdings or rebalance portfolios, giving them a total of seven months to comply.

Despite initial concerns, no panic selling is anticipated. SEBI estimates assets held by FPIs above the thresholds at around Rs 2.6 trillion. However, exemptions in the standard operating procedure (SOP) issued by custodians will greatly reduce the impact.

Exemptions are provided to FPIs that are sovereign wealth funds, listed companies on certain global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings.

Currently, FPIs' equity holdings exceed Rs 60 trillion. Industry experts estimate that Rs 40,000 crore to Rs 60,000 crore worth of FPI assets might need liquidation if UBO disclosures are not provided.

Recently, FPIs withdrew nearly Rs 30,000 crore from domestic markets, mainly from banking stocks like HDFC Bank, where high single-group exposure by FPIs is not a concern. Most FPIs with holdings above Rs 25,000 crore in Indian markets are exempt.

FPIs with over 50% exposure in a single corporate group face no risk of violating minimum public shareholding rules and can benefit from these exemptions.

According to the SOP for custodians, government and government-related investors registered as Category 1 FPIs, or those with at least 75% ownership by such entities, are exempt from detailed disclosures.

Public retail funds, such as pension and insurance funds, and regulated pooled investment vehicles are also exempted if custodians follow specified verification. Exchange-traded funds (ETFs) on exchanges in the US, Japan, South Korea, France, the UK, Germany, Canada, and India's IFSC are exempt if they have less than 50% exposure to India-listed equities.

SEBI approved changes to FPI regulations in June 2023 to require detailed economic interest disclosures, aiming to prevent circumvention of minimum public shareholding norms following allegations by Hindenburg Research against the Adani group.

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