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Single Corporate Group focused FPIs & Large value FPIs to disclose granular details of beneficial ownership

Prapti Kanakia | corplaw@vinodkothari.com

August 2, 2024 (original article dated October 31, 2023)

SEBI Circular, effective 1st November 2023, required FPIs to provide the details of their beneficial owners without applying any threshold in the shareholding or on layers of intermediate entities until all the natural persons are identified. An enabling provision to this effect had also been inserted as Reg. 22(6) in SEBI (Foreign Portfolio Investors) Regulations, 2019 effective from 10th August 2023. SEBI vide circular dated 27th July, 2023, had also mandated all non-individual FPIs to obtain Legal Entity Identifier (LEI) number by 23rd January 2024[1]. However, LEI could not address the requirement of additional disclosures as the LEI data stops at the parent entity level and does not provide the details of natural persons in control of the entity.

As to what could be the trigger for these regulatory changes may be anybody’s guess, but tacitly, the SEBI circular dated 24th August, 2023[2] (Circular) introducing some significant changes in beneficial ownership details by FPIs, made several admissions. It seemingly admitted that the disclosure of beneficial ownership by FPIs took advantage of technicalities by structuring the holding of natural persons to less than 10%. It also admitted that several FPIs had concentric investments in a single corporate group, making it apparent that these FPIs were used as conduits for investing in a single entity, and therefore, there may be affiliation between the FPIs and the controlling shareholders.

Briefly stated, the changed norms required FPIs, which have either (a) 50% or more of their Indian equity AUM in a single corporate group; or (b) hold along with investor group more than INR 25,000 Crore of equity AUM in Indian markets, to disclose their beneficial ownership, drilled down to the natural person level, irrespective of the percentage of holding, unless eligible for exemption.

These requirements, though effective from 1st November 2023, gave a time frame of 90 calendar days for existing FPIs to re-adjust their holdings. Meaning, FPIs had time till 29th January 2024 to realign their investment within the threshold prescribed in order to avoid providing the details of the beneficial owner as required under the Circular. Post 29th January 2024, FPIs whose investment continued to exceed the threshold as mentioned above were required to disclose the details of beneficial owners within 30 trading days ending on 12th March 2024, which if not provided led to cancellation of the FPI registration license and in the interim, blocking of account for further purchase of equity securities and restricted voting rights in investee companies. 

Mandatory Beneficial Ownership (‘BO’) disclosure

The new norms differed from the erstwhile norms, where BO disclosure was required if a natural person’s beneficial holding exceeded the threshold as prescribed under PML (Maintenance of Records) Rules 2005, as indicated below:

Figure I  – Threshold under PML (Maintenance of Records) Rules, 2005

The new norms required mandatory disclosure of BO, irrespective of the percentage of holding by the BO. No matter how many layers of entities covered the identity of the BO, FPIs had to identify the natural persons holding any ownership, economic interest, or exercising control, if the FPIs fall in either of the 2 categories discussed below, unless exempted.

FPIs covered under the Circular

  1. Single Corporate Group focused FPIs:

If, instead of investing in a diverse pool of assets, an FPI has concentrated into a single corporate group, there are apparent concerns that the FPI is being used as a facade for making investments into a single entity. Thus, if on an AUM basis, more than 50% of the AUM of an FPI is in a “single corporate group”, the FPI has to provide the BO disclosure unless exempted (refer discussion below).

Intent: As per SEBI BM Agenda, the intent is to ensure there is no circumvention of minimum public shareholding norms or disclosures under SAST Regulations or investing funds routed through land border sharing countries and therefore, the need to obtain granular information around the ownership of, economic interest in, and control of FPIs with concentrated equity holdings in single companies or corporate groups.

Meaning of single corporate group: SEBI did not provide any clarity on single corporate group and left it to the stock exchanges/depositories. Rather than limiting to the existing law, BSE/NSE[3] identified a single corporate group more practically. Apart from entities having common control i.e. holding, subsidiary, associate, joint venture, and entities where promoters have major shareholding, entities which are mentioned on the website or in the annual report of the entity as a group company, have also been considered as a part of the group.

Basis this definition, BSE on its own identified the companies forming part of a single corporate group and asked the listed entities to confirm the name of the group as identified by BSE by sending communication in terms of Para 16 of the SEBI Circular that requires Stock exchanges/ Depositories to maintain a repository containing names of companies forming a part of each single corporate group and disseminate the same publicly on their websites[4].

  1. Large sized FPIs:

FPIs with an AUM of more than INR 25,000 crore, either individually or along with their investor group[5], may pose a systematic risk in the Indian markets. It will be more concerning if such FPIs are tacitly controlled by unfriendly nations, and therefore, SEBI mandated BO disclosure from such FPIs too.

Intent: As per SEBI BM Agenda, the intent was to examine from the perspective of DPIIT Press Note 3 of April 17, 2020 (although not applicable to FPI investments), if the FPI route could potentially be misused to circumvent the stipulations of the same and disrupt the orderly functioning of Indian securities markets by their actions by having a substantial number of investors from countries that share land borders with India. It is likely that the FPI with a large Indian equity portfolio may itself be situated out of a non–land bordering country, the first level/ intermediate investors in such FPIs may be based out of land–bordering countries. This reiterated the need to obtain granular information around the ownership of, economic interest in, and control of such FPIs.

Exemption from BO disclosure

  1. Single Corporate Group (‘SCG’) focused FPIs
  1. Investment in SCG is insignificant compared to global investment

There might be cases where the FPI has taken exposure over an SCG only, however, may have investments globally as well and the percentage of Indian investments might be quite less when compared with its overall global investment. In such a scenario, there are fewer chances of FPIs being used as a conduit for avoiding compliance or hiding the identity of the BO. Therefore, the FPIs which are holding more than 50% of their Indian AUM in an SCG and such investments are less than 25% of their global AUM, are exempt from providing the BO disclosure.

  1. No identified promoter in SCG

SEBI vide circular[6] dated 20th March, 2024, further exempted SCG focused FPIs meeting the following conditions:

  • The apex company does not have identified promoter;
  • Such FPI holds not more than 50% of its India equity AUM in the corporate group, after excluding its holding in the apex company with no identified promoter.
  • The composite holdings of all such FPIs (having SCG exposure) in the apex company with no identified promoter, is less than 3% of its total equity share capital,

Intent: As per the Consultation Paper the intent is that if FPI has exposure in SCG with no identified promoter in the apex company, there is no risk of circumvention of minimum public shareholding provision and may be exempted from the disclosure requirement. Further, there is a possibility that even though the apex company itself has no identified promoter, the FPI might still hold a significant part of its portfolio in group companies that have an identified promoter and therefore if their holding in the group is not significant exemption can be granted.

Fig. II Exemption from disclosure requirement in case there is no promoter in SCG.

  1. Large sized FPIs,

FPIs whose Indian AUM is more than INR 25,000 crore and their investments in India are less than 50% of their overall global investments are exempt from providing such disclosure since the probability of such FPIs being used as a facade to obtain control over Indian markets is quite less.

  1. General Exemption

FPIs that have a wide investor base or are backed by the government or government related investors do not pose any risk to Indian markets or the probability is quite low, and therefore the following categories of FPIs are exempt from providing BO disclosure. Also, if the investors in FPI fall under the below mentioned categories, then identification of BO for such investors will not be required. In case the constituents of Large sized FPIs fall under below mentioned category, their holding will also not be aggregated with their investor group to calculate the limit of Rs. 25,000 Crore.

Figure III – List of exempted FPI[7]

The below figures provide a gist of the scenarios where FPIs are required to provide the disclosure

Figure IV – Flowchart depicting the scenarios that would warrant additional disclosures

Responsibility of DDPs/Depository

The FPIs are put under the obligation to ensure compliance with the SEBI Circular, i.e. providing the BO disclosure and monitoring the concentration limit in a single corporate group and the equity investments in India. Additionally, DDPs are also required to monitor the same and intimate the FPIs wherever they breach the criteria and once the registration of FPI is invalidated as a result of non-disclosure, the Depository will intimate the investee listed company to freeze the voting rights of such FPIs to the extent of actual shareholding or shareholding corresponding to 50% of its equity AUM on the date its FPI registration is rendered invalid, whichever is lower (refer the example below).

To ensure that there is no regulatory arbitrage amongst DDPs, a standard operating procedure (SOP)[8] has been framed & followed by all the DDPs to independently validate the conformance of FPIs with the conditions and exemptions prescribed. The SOP is based on the application of the core principles of minimising Type II errors i.e. where legitimate FPIs and their investors face challenges of onerous regulatory requirements) without adding to Type I errors i.e., where FPIs that may be breaching regulations, circumvent the need to make disclosures that would bring such breaches to light, through the ‘trust – but verify’ route.

Responsibility of a Listed Entity

The FPIs whose registration is rendered invalid as a result of non-disclosure are restricted from casting their vote and it is the responsibility of investee listed company to ensure that the voting rights of such FPIs are freezed to the extent of actual shareholding or shareholding corresponding to 50% of equity AUM on the date its FPI registration is rendered invalid, whichever is lower. The said information will be provided by the depository to the investee listed entity/its RTA. The following example clarifies calculation of extent of shareholding to be freezed.

Eg. FPI XYZ has 60 shares of Company A and 40 shares of Company B as on May 13, 2024, and the FPI fails to make the additional disclosures, thereby rendering its FPI registration invalid from May 13, 2024. Thereafter, FPI’s voting rights shall be restricted to shareholding corresponding to 30 shares of Company A and 20 shares of Company B.

Suppose as on July 01, 2024, the FPI has liquidated some shares and holds 15 shares of Company A and 30 shares of Company B. As on this date, the FPI will be able to exercise voting rights corresponding to 15 shares of Company A but only 20 shares of Company B (maximum permissible voting rights in Company A).[9]

The listed entities were required to intimate the details of their corporate group to the stock exchanges and any change is to be intimated within 2 working days of the effective date of such change[10].

The non-compliant FPIs are also restricted from purchasing further equity shares, however, the responsibility is not upon the listed entity to not issue equity shares to such FPIs. The DDPs/Custodian will block the account of FPIs for further purchases and they cannot participate in any corporate action which increases the equity shareholding such as rights issue, FPOs, etc. However, credit as a result of any involuntary corporate actions such as bonus issue, scheme of arrangement, etc will be allowed.

Conclusion

SEBI had stated that there cannot be sustained capital formation without transparency and trust. The Circular is a move to foster trust and increase transparency in the Indian Capital markets. The Circular does not seem to be a hindrance to genuine FPIs, though operational challenges might be faced by the FPIs in identifying the BOs.


[1] 180 days from the date of issue of the SEBI Circular.

[2] The said circular was approved in the SEBI Board meeting dated 28th June, 2023

[3] Circular dated 30th November 2023

[4] NSE – https://www.nseindia.com/regulations/listing-compliance

BSE – https://www.bseindia.com/static/about/corporate_group_repository.aspx

[5] Investor group means FPIs which, directly or indirectly, have common ownership of more than 50% or common control.

[6] The said exemption was approved in the SEBI Board meeting dated March 15, 2024

[7] Exemption to University Funds fulfilling certain conditions granted vide SEBI Circular dated August 01, 2024

[8] https://av.sc.com/in/content/docs/in-sop-for-granular-reporting.pdf

[9] Calculation manner as provided in SOP

[10] BSE Circular dated 09th February, 2024


SEBI approves uniform approach for market rumour verification, eases on-going compliance requirement for listed companies, eases norms for IPO/ fund raising, AIFs, relaxes requirement for FPI & extends timeline for HVDLE on March 15, 2024

-Avinash Shetty and Manisha Ghosh | corplaw@vinodkothari.com

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Other related resources:

  1. LODR Resource Centre
  2. AIFs ail SEBI: Cannot be used for regulatory breach
  3. FPIs – Synoptic Overview
  4. FPIs with single corporate group concentration to disclose beneficial ownership

FPIs – Synoptic Overview

Prapti Kanakia and Heta Mehta | corplaw@vinodkothari.com

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Our Resources on the topic:-

  1. FPIs with single corporate group concentration to disclose beneficial ownership
  2. Familiar with FEMA (YouTube series)
  3. Investment window for FPIs widened
  4. Introduction to FEMA & FEMA (NDI) Rules, 2019

RBI grants additional 3 months to FPIs under Voluntary Retention Route

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

In March, 2019, the RBI with an objective to attract long-term and stable FPI investments into debt markets in India introduced a scheme called the ‘Voluntary Retention Route’ (VRR)[1]. Investments through this route are in addition to the FPI General Investment limits, provided FPIs voluntarily commit to retain a minimum of 75% of its allocated investments (called the Committed Portfolio Size or CPS) for a minimum period of 3 years (retention period).However, such 75% of CPS shall be invested within 3 months from the date of allotment of investment limits. Recognizing the disruption posed by the COVID-19 pandemic, RBI vide circular dated May 22, 2020[2], has granted additional 3-months relaxation to FPIs for making the required investments. The circular further addresses the questions as to which all FPIs are covered under this relaxation and how the retention period will be determined.

This article intends to discuss the features of the VRR scheme and the implications of RBI’s circular in brief.

What is ‘Voluntary Retention Route’?

RBI, to motivate long term investments in Indian debt markets, launched a new channel of investment for FPIs on March 01, 2019[3] (subsequently the scheme was amended on May 24, 2019[4]), free from the macro-prudential and other regulatory norms applicable to FPI investment in debt markets and providing operational flexibility to manage investments by FPIs. Under this route, FPIs voluntarily commit to retain a required minimum percentage of their investments for a period of at least 3 years.

The VRR scheme was further amended on January 23, 2020[5], widening its scope and provides certain relaxations to FPIs.

Key features of the VRR Scheme:

  1. The FPI is required to retain a minimum of 75% of its Committed Portfolio Size for a minimum period of 3 years.
  2. The allotment of the investment amount would be through tap or auctions. FPIs (including its related FPIs) shall be allotted an investment limit maximum upto 50% of the amount offered for each allotment, in case there is a demand for more than 100% of amount offered.
  3. FPIs may, at their discretion, transfer their investments made under the General Investment Limit, if any, to the VRR scheme.
  4. FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
  5. Investment under this route shall be capped at Rs. 1,50,000/- crores (erstwhile 75,000 crores) or higher, which shall be allocated among the following types of securities, as may be decided by the RBI from time to time.
    1. ‘VRR-Corp’: Voluntary Retention Route for FPI investment in Corporate Debt Instruments.
    2. ‘VRR-Govt’: Voluntary Retention Route for FPI investment in Government Securities.
    3. ‘VRR-Combined’: Voluntary Retention Route for FPI investment in instruments eligible under both VRR-Govt and VRR-Corp.
  6. Relaxation from (a) minimum residual maturity requirement, (b) Concentration limit, (c) Single/Group investor-wise limits in corporate bonds as stipulated in RBI Circular dated June 15, 2018[6] where exposure limit of not more than 20% of corporate bond portfolio to a single corporate (including entities related to the corporate) have been dispensed with. However, limit on investments by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond except for investments by Multilateral Financial Institutions and investments by FPIs in Exempted Securities.
  7. FPIs shall open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. All fund flows relating to investment through the VRR shall reflect in such account(s).

What are the eligible instruments for investments?

  1. Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs);
  2. Any instrument listed under Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019 other than those specified at 1A(a) and 1A(d) of that schedule; However, pursuant to the recent amendments, investments in Exchange Traded Funds investing only in debt instruments is permitted.
  3. Repo transactions, and reverse repo transactions.

What are the options available to FPIs on the expiry of retention period?

Option 1

 

Continue investments for an additional identical retention period
 

 

 

Option 2

 

Liquidate its portfolio and exit; or

 

Shift its investments to the ‘General Investment Limit’, subject to availability of limit under the same; or

 

Hold its investments until its date of maturity or until it is sold, whichever is earlier.

Any FPI wishing to exit its investments, fully or partly, prior to the end of the retention period may do so by selling their investments to another FPI or FPIs.

3-months investment deadline extended in view of COVID-19 disruption

As discussed above, once the allotment of the investment limit has been made, the successful allottees shall invest at least 75% of their CPS within 3 months from the date of allotment. While announcing various measures to ease the financial stress caused by the COVID-19 pandemic, RBI Governor acknowledged the fact that VRR scheme has evinced strong investor participation, with investments exceeding 90% of the limits allotted under the scheme.

Considering the difficulties in investing 75% of allotted limits, it has been decided that an additional 3 months will be allowed to FPIs to fulfill this requirement.

Which all FPIs shall be considered eligible to claim the relaxation?

FPIs that have been allotted investment limits, between January 24, 2020 (the date of reopening of allotment of investment limits) and April 30, 2020 are eligible to claim the relaxation of additional 3 months.

When does the retention period commence? What will be the implication of extension on retention period?

The retention period of 3 years commence from the date of allotment of investment limit and not from date of investments by FPIs. However, post above relaxation granted, the retention period shall be determined as follows:

FPIS

 

RETENTION PERIOD
*Unqualified FPIsRetention period commence from the date of allotment of investment limit

 

**Qualified FPIs opting relaxation

 

 

Retention period commence from the date that the FPI invests 75% of CPS
Qualified FPIs not opting relaxation

 

Retention period commence from the date of allotment of investment limit

*Unqualified FPIs – whose investments limits are not allotted b/w 24.01.2020 and 30.04.2020

**Qualified FPIs to relaxation – whose investments limits not allotted b/w 24.01.2020 and 30.04.2020 

What will be the consequences if the required investment is not made within extended period of 3 months?

Since no separate penal provisions are prescribed under the circular, in terms of VRR Scheme, any violation by FPIs shall be subjected to regulatory action as determined by SEBI. FPIs are permitted, with the approval of the custodian, to regularize minor violations immediately upon notice, and in any case, within 5 working days of the violation. Custodians shall report all non-minor violations as well as minor violations that have not been regularised to SEBI

Concluding Remarks

The COVID-19 disruption has adversely impacted the Indian markets where investors are dealing with the market volatility. Given this, FPIs are pulling out their investments from the Indian markets (both equity and debt). Thus, relaxing investments rules of VRR Scheme during such financial distress, will help the foreign investors manage their investments appropriately.

You may also read our write ups on following topics:

Relaxations to FPIs ahead of Budget, 2020, click here

Recommendations to further liberalise FPI Regulations, click here

RBI removes cap on investment in corporate bonds by FPIs, click here

SEBI brings in liberalised framework for Foreign Portfolio Investors, click here 

For more write ups, kindly visit our website at: http://vinodkothari.com/category/corporate-laws/

To access various web-lectures, webinars and other useful resources useful for the Corporate and Financial sector, visit and subscribe to our Youtube channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

[1]https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11561&Mode=0

[2]https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11896&Mode=0

[3]https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11492&Mode=0

[4]https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11561

[5]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR19FABE1903188142B9B669952C85D3DCEE.PDF

[6] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT199035211F142484DEBA657412BFCB17999.PDF