As the deadline for foreign portfolio investors (FPIs) to disclose their beneficial ownership (BO) to the Securities and Exchange Board of India (SEBI) closes in on September 9, the financial market is witnessing heightened anxiety. This regulatory requirement is part of SEBI’s move to bring greater transparency and prevent possible round-tripping of funds. However, not all FPIs are compliant, and two prominent Mauritius-based investors—LTS Investment Funds and Lotus Global Investment—have sought legal recourse to extend their compliance deadline.
These two FPIs were flagged in the January 2023 Hindenburg report, which scrutinized the Adani Group for opaque financial dealings. As a result, SEBI introduced tighter regulations to ensure all FPIs disclose detailed information on entities holding any ownership, economic interest, or control over the funds. While SEBI’s objective is to curtail suspicious activity and ensure accountability, some investors argue that the regulations unfairly target certain FPIs, leading to investor discrimination. In response, LTS and Lotus Global have approached the Securities Appellate Tribunal (SAT) for an extension until March 2025 to meet the new requirements.
SEBI’s 2023 Circular
SEBI’s August 2023 circular mandates FPIs with either more than 50% of their assets in a single corporate group or over ₹25,000 crore invested in Indian equities to disclose the details of their beneficial owners. This rule aims to prevent misuse of the FPI route by Indian promoters looking to bypass regulations through foreign investments. Non-compliance by September 9 could lead to penalties or even the cancellation of an FPI’s license to operate in India, forcing them to liquidate their holdings.
Market Implications
The uncertainty has already led to volatility in the stock market. In August alone, FPIs pulled out ₹20,339 crore from Indian equities, largely driven by fears surrounding the new rules. Experts predict that if SEBI enforces the September 9 deadline without any leniency, it could trigger a fresh wave of sell-offs, especially among non-compliant funds. This could impact the broader market, though some believe the market has already priced in the potential risks.
However, there are also provisions for relief. Some sources indicate that FPIs failing to comply by September 9 could continue operating by paying a penalty of 5%, buying themselves an additional six months to align with SEBI’s norms. This would offer some breathing room to funds scrambling to meet the regulatory deadline.
What Happens Next?
The SAT’s ruling on LTS Investment Funds and Lotus Global Investment’s petition will play a crucial role in determining market sentiment moving forward. A favorable ruling for these FPIs could ease the pressure on foreign investors, but if SAT sides with SEBI, it could push some funds to exit the Indian market, exacerbating the ongoing market sell-off.
While SEBI’s stricter regulations aim to ensure transparency and reduce risks, they have sparked debates over the fairness of the rules and their impact on market liquidity.
Conclusion:
The outcome of the legal plea by LTS and Lotus Global will set a precedent for other FPIs facing similar scrutiny. For now, the market remains on edge as the deadline nears, and all eyes are on SEBI and SAT’s next moves.
Credit: This article is based on information from Indian Express and ET Now.
Summary:
- Two Mauritius-based FPIs, flagged in the Hindenburg report, have sought a legal extension to SEBI’s disclosure deadline.
- SEBI introduced new norms to improve transparency, mandating FPIs to reveal their beneficial ownership.
- Non-compliance could lead to heavy penalties or even cancellation of the FPI’s license to operate in India.
- The final ruling from the Securities Appellate Tribunal (SAT) will have major market implications.
