The PMLA and FII laws do not yet contain any protections to stop FPIs from hiding their economic control over listed firms.
Foreign portfolio investors (FPIs) who have concentrated interests in a single corporate entity or who have exposure to the Indian stock market over a certain threshold will now be required to provide extra disclosures.
The 2019 SEBI (Foreign Portfolio Investors) Regulations Amendment was adopted by the Board of the Securities and Exchange Board of India (Sebi), according to a press statement issued following the Board meeting.
Sebi wants to close the loopholes in the Foreign Institutional Investor Regulations and the Prevention of Money Laundering Act (PMLA) by utilising this to stop the opportunistic purchase of Indian enterprises and the breach of the minimum public sector ownership requirements.
Following the Board meeting, Sebi stated that FPIs that meet specific criteria will need to disclose additional granular level disclosures regarding ownership, economic interest, and control of objectively identified FPIs meeting certain criteria on a full look through basis, subject to the conditions and exemptions as determined by the Board from time to time.
This will include FPIs who hold more than 50% of their Indian equity AUM in a single Indian corporate group or FPIs who, individually or in conjunction with their investor group as defined under Regulation 22(3) of the SEBI (Foreign Portfolio Investors) Regulations, 2019, hold more than INR 25,000 crore of equity AUM in the Indian markets.
The government and investors with links to the government, pension funds, public retail funds, some listed exchange-traded funds (ETFs), corporate entities, and verified pooled investment vehicles satisfying specific requirements would be excluded from this.
The amount of FPI AUM that will be impacted by this legislation, according to the market regulator, is expected to be Rs 2.6 lakh crore, or 6% of all FPI AUM, or less than 1% of India’s overall equities market capitalization.
Additionally, the market regulator has outlined who is not eligible to register as an FPIS. According to the press release, applicants that have investors who have contributed 25% or more to the corpus and who are included on the UN Security Council’s Sanctions List are not eligible to be registered as FPIs.
“The PML Rules threshold criteria for identifying BO (beneficial owners) were modified in March 2023 and are now 10% for corporations and trusts and 15% for partnerships and unincorporated associations or bodies of persons. The Board has authorised amendments to the FPI Regulations to bring the eligibility requirements mentioned above into compliance with the lower threshold outlined in the PML Rules, it was stated.
Rule gaps regarding money-laundering :
The PMLA and FII laws do not yet contain any protections to stop FPIs from hiding their economic control over listed firms.
The PML Rules provide materiality standards based on ownership, or right to capital or earnings (i.e., economic interest), for determining the beneficiary owner of legal companies. These are 10% for businesses and trusts and 15% for partnerships. Additionally, it states that a beneficial owner includes any natural individuals who have the last say in how a legal entity or arrangement is run.
Because each investment entity in the FPI category is “generally found to be below the threshold prescribed under PML rules,” many beneficial owners who possess this economic interest are not revealed, according to the Sebi consultation paper on FPI disclosures standards.
However, there is a chance that a single individual might be in possession of economic control over the FPI through a number of investment organisations, each of which is below the threshold for being recognised as beneficial ownership.
