By Trisha Shreyashi

The Securities & Exchange Board of India (SEBI) has proposed two exemptions to the additional disclosure framework for Foreign Portfolio Institutions (FPIs) specified under the August 24, 2023, circular (August Circular). SEBI came out with its proposal in a Consultation Paper dated February 27, 2024.

SEBI’s August circular amended the SEBI (Foreign Portfolio Investors) Regulations, 2019 (FPI Regulations, 2019) and Regulations 22(6) and 22(7) were inserted. It had mandated granular disclosure of all entities holding any ownership, economic interest, or control in an FPI, on a full look-through basis, without any threshold, by FPIs that fulfilled certain criteria including holding more than 50 percent of their Indian equity Assets Under Management (AUM) in a single Indian corporate group and individually, or along with their investor group hold more than Rs 25,000 crore of equity AUM in the Indian markets.

In the consultation paper, SEBI seeks to exempt Category I University Funds and University-related Endowments FPI that meet certain objective criteria from the requirement of enhanced disclosures. The second proposal is to exempt enhanced reporting requirements for some funds with concentrated holdings in entities with no identified promoter group, where there is no risk of breach of Minimum Public Shareholding (MPS).

Exemption for university funds and university-related endowments.

The Consultation Paper proposes exemption of university funds and university-related endowments, registered or eligible to be registered as Category I FPI, from the disclosure requirements prescribed under the August Circular. University Funds and University-related Endowments that meet certain size, vintage, stature, tax status, disclosure of holdings, and broad-based holdings criteria may be exempted from the additional disclosure requirements.

The said FPIs may be subject to additional conditions. The exemption may be provided to the university listed in the Top 200 ranking as per the latest available QS World University Rankings issued by QS Quacquarelli Symonds Limited, and/or if its India equity AUM is less than 25% of its Global AUM, and/or to such FPIs with global AUM is more than INR 10,000 crore, and/or have filed appropriate return/filing to the respective tax authorities in their home jurisdiction to evidence that the entity is a non-profit organisation and is exempt from tax.

It is pertinent to mention that university funds and endowments receive contributions from various donors and the returns from such investments accrue to the University, rather than to the donors. Further, such funds enjoy tax-exempt status in their home jurisdictions, and are therefore subject to disclosure requirements to ensure that the corpus of the fund is used for the purposes for which the fund was set up. Accordingly, University Funds and University-related Endowments that meet certain size, vintage, stature, tax status, disclosure of holdings, and broad-based holdings criteria have been proposed to be exempted from the additional disclosure requirements. Similarly, university-related endowments of such universities that have been in existence for more than five years and based in FATF member countries, are eligible for registration as Category I FPI, as per FPI Regulations, 2019.

The previously mentioned conditions have been proposed to ensure that the exemption is not misused through setting up of endowments for lesser-known universities in jurisdictions where no or minimal disclosures are available. Further, the AUM criteria is proposed to ensure that only well-funded and diversified funds are eligible for the exemption.

Exemption for companies with no identified promoter and low FPI holdings

Firstly, the Consultation Paper proposes to relax the additional disclosure requirements for FPIs holding concentrated positions in corporate groups and listed companies where there is no room for circumvention of MPS requirements.

However, the concerns regarding the circumvention of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011(SAST Regulations) would persist, as per the consultation paper. It is pertinent to note that under the SAST requirements, any investor along with Persons Acting in Concert, acquiring more than 5 percent shares or voting rights in a listed company is required to make the disclosures prescribed therein. Disclosures are further to be made for either an increase or decrease in holding of 2 percent thereafter. Further, holdings above 25 percent would require an open offer to be made.

Secondly, it proposes to relax the additional reporting requirement for FPIs with more than 50% of its India equity AUM in the manner explained below.

If such FPI holds more than 50% of its India equity AUM in the corporate group, even after disregarding its holding in the apex company (with no identified promoter), it would come under the disclosure requirements of the August circular. If not, if the composite holdings of all such FPIs in the apex company is less than 3% of the total equity share capital of the company, it would be exempted from the additional disclosure requirements.

The rudimentary concept here is that there is no risk of circumvention of MPS requirements in case of listed entities with no identifiable promoters. Further, the potential risk of circumvention of SAST Regulations through the FPI route may be mitigated by adoption of an acceptable risk threshold of 3% holding as against the extant SAST thresholds.

Accordingly, it proposes that the custodians and depositories will be supposed to track the utilisation of this 3% limit for companies without an identified promoter at the end of each day. When the 3% limit is met or breached, depositories and custodians must make this information public before the start of trading the next day. Thereafter, prospective positions in the company that breach the 50% concentration criteria in the corporate group will be required to either realign such positions below the 50% threshold within 10 trading days, or provide disclosures prescribed under the August circular; provided the aforementioned 3% cumulative FPI limit for the listed company continues to be in breach through the 10 trading days.

It can thus be inferred that the exemptions have been proposed to strike a balance between ease of doing business and prevent circumvention of MPS norms, requirements under the SAST Regulations, and Press Note 3, 2020, and the FPI Regulations, 2019. Public comments/ suggestions have been invited latest by March 08, 2024.

(The author Trisha Shreyashi is a lawyer, writer, and member of the Cambridge University Press (CUP) Academic Panel. Views expressed are the author’s own and not necessarily those of financialexpress.com.)