By Siddharth Shah and Shikhar Kacker

Foreign Portfolio Investors (FPIs) find themselves caught in a double bind, grappling with a frequently evolving policy landscape on beneficial ownership (BO) disclosure while racing against a hard deadline to liquidate their holdings in the Indian equity market. In the backdrop are their pending application with the Securities Exchange Board of India (SEBI), seeking exemption from BO disclosure requirements under SEBI's circular dated 24 August 2023 (Circular).

The current situation, affecting a significant number of FPIs, is a result of SEBI’s policy regarding granular BO disclosure by certain type of FPIs, i.e., those whose concentration in a single Indian corporate group or overall equity Assets Under Management (AUM) in the Indian markets exceeds the thresholds specified in the Circular.

Original deadlines

FPIs which were in breach of either of these thresholds, unless exempt, were required to realign their Indian equity holdings below the relevant thresholds, within 90 days from 1 November 2023. Failure to bring down their equity holdings below the thresholds obligated such FPIs to furnish granular details of their BOs within the next 30 days.

Non-disclosure rendered their license invalid and mandated the liquidation of their holdings within the next 180 days.

Post expiry of the 180-day period, FPIs have an additional window of 180 days to liquidate their holdings, subject to payment of a financial disincentive of 5% of sale proceeds towards SEBI’s Investor Protection and Education Fund.

Mid-course policy change

The controversy emanates out of SEBI’s mid-way change in its policy to withdraw the exemption allowed to certain type of Pooled Investment Vehicles (PIVs) from furnishing granular BO details. The Circular exempts four category of FPIs that don't pose systemic risks or face genuine constraints in adhering to the specified limits, from having to furnish granular BO details, including regulated PIVs whose India allocation remains below a certain percentage of their global AUM.

The specific eligibility criteria to claim exemption was detailed in a subsequently issued Standard Operating Procedure (SOP), jointly issued by Designated Depository Participants (DDPs) in September 2023, reflecting SEBI’s policy on the subject.

Another change in February 2024

However, in February 2024, SEBI directed DDPs to place on hold exemption requests of PIVs. In absence of any express amendment to the SOP, FPIs otherwise eligible for exemption were faced with a unique challenge to either make a granular BO disclosure or risk having their license rendered invalid.

This was a significant setback for FPIs which were eligible for exemption and did not initiate steps to identify granular BOs details or to pare down their holdings within the stipulated window.

It was only in late May 2024 that the SEBI’s directives to DDPs were formally documented in an amended SOP.

The Section 43B carve out

In the interregnum, lacking a direct platform to engage with the SEBI, FPIs were advised by their DDPs to file applications under Regulation 43B of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2019 (FPI Regulations), that empowers SEBI to exempt FPIs from strict enforcement of the regulations if the non-compliance is caused by factors beyond their control or if the requirement is procedural or technical in nature.

Pending applications

As things stand today, in the absence of any statutory timeline provided under the FPI Regulations for disposing of applications under Regulation 43(B), FPIs are unsure about the fate of their pending applications in view of the impending September 9, 2024 deadline.

It is the case of FPIs that their license should not be rendered invalid, and they ought to be granted exemption, as their right to claim exemption accrued in their favour when they approached DDPs seeking exemption and the same cannot be taken away by way of change in policy apparently communicated only to DDPs without bringing a retrospective amendment.

FPIs have also been quick to point out that SEBI has already issued four consultation papers and three circulars concerning this subject matter. Therefore, it would have been ideal if, prior to implementing the policy, an in-depth consultation on this subject matter had been carried out, or at least the deadlines were kept in abeyance pending further clarity on the matter.

In view of the impending deadline, one would hope that the pending applications would be disposed of expeditiously in accordance with law, so that FPIs are not handed over a fait accompli.

Further, there may be FPIs who have realigned their portfolio or met the granular BO disclosure requirements, albeit post the cut-off dates. It would be ideal if SEBI considers taking a more pragmatic approach of allowing such FPIs to continue with their now compliant structure rather than forcing them to close down the existing structures.

There are significant costs and hardship involved in winding-down a structure and to recreate a fresh structure. Importantly, it may also send a negative message to the global investors regarding the stability of the regulatory regime, forcing them to rethink their India strategy, especially whether to reinvest the liquidated positions back to Indian market.

(Siddharth Shah is a Partner and Shikhar Kacker is a Counsel at Khaitan & Co.)

Views are personal and do not represent the stand of this publication.