Overseas Investment Funds: SEBI Seals Plan to Rein in Misuse

Market regulator, the Securities and Exchange Board of India (SEBI), has initiated a plan jointly with Foreign Portfolio Investors (FPI) custodians to rein in promoter families and unwanted foreign investors from acquiring shares in an underhanded manner and manipulating the stocks of domestic-listed companies via offshore pooled investment entities operating as FPIs.

The Standard Operating Procedure (SOP) has been introduced following new disclosure regulations that direct FPIs with more than specific investment thresholds to disclose the identities of all individuals associated with the entities that have invested in the fund or hold control over it.

These disclosure rules will come into force when the exposure of an FPI to Indian equities hits more than Rs 25,000 crore or if it invests 50% of its assets under management in India in companies that may be affiliated with a single corporate group.

Set to come into effect from November 1, 2023, these regulations are the after-effect of the controversy surrounding the US-based short-seller Hindenburg, who had accused the Adani group of price manipulation and accounting fraud.

However, a few FPI entities will be given exemptions from disclosure regulations based on their ownership, structure, and objectives, provided they address specific criteria. Overseas insurance and reinsurance entities, pooled investment vehicles, pension funds, and Exchange-Traded Funds (ETFs) are in the category of exemptions, provided they meet certain conditions.

While being different from their Indian counterparts, overseas insurance companies provide products that ensure that investors are able to influence the allocation of their funds. The investor directing these choices covers up their identity by registering as an FPI with the market regulator via the insurance company.

Similarly, pooled vehicles like a Protected Cell Company (PCC) in Mauritius or a Singapore-based Variable Capital Company (VCC), along with multiple sub-funds, can be influenced by one or some investors who indirectly shape their operations.

In the case of current FPIs breaching the investment limit by October 31, 2023, they are required to reduce their exposure within the next 90 days, which is mandated to be completed by January 29, 2024.

In a scenario where they fail to comply, then they will be required to disclose all beneficial owners’ identities by March 11, 2024, or this could result in potential closure. In addition, FPIs surpassing the investment limit after November 1, 2023, are required to reduce their exposures within a  timeframe of 10 days.