SEBI Proposes Enhanced Disclosures For High-Risk FPIs To Address Money Laundering Concerns

The Securities and Exchange Board of India (SEBI) has recently released a consultation paper that proposes enhanced disclosure requirements for high-risk foreign portfolio investors (FPIs). This initiative aims to address a loophole in the Prevention of Money Laundering Act (PMLA) and the current Foreign Institutional Investor (FII) regulations.

SEBI intends to make it mandatory for high-risk FPIs to provide comprehensive information regarding their ownership, economic interests, and control rights. By implementing these measures, the market regulator seeks to strengthen transparency and ensure better regulation of high-risk FPI activities.

"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 regulator has proposed categorising FPIs according to risk. The government and allied entities such as central banks and sovereign wealth funds are classified as low-risk, whereas pension funds and public retail funds are classified as moderate-risk. All other FPIs have been designated as high-risk. High-risk FPIs that have more than 50% of their equity assets under management (AUM) in a single business group would be required to comply with the additional disclosure requirements.

"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 proposed requiring high-risk Foreign Portfolio Investors (FPIs) that have 50% or more of their equity assets under management in a single corporate entity to give additional disclosures about the funds' ownership, economic interest, and control. These disclosures must include all natural individuals engaged, as well as public retail funds and significant publicly traded organisations. Similar disclosure requirements have been recommended for FPIs with an aggregate holding of more than Rs 25,000 crore in Indian equities markets.

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

"Such FPIs shall be required to provide 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." -SEBI

The regulator has asked for public feedback on the idea by June 20.