-By Siddharth Bhadoriya
Introduction
The Securities and Exchange Board of India (SEBI) has proposed significant changes in regulating FPIs in India. As per the proposal, the threshold for FPIs to make granular disclosures about their investments in Indian equities will be doubled to Rs 50,000 crore. At present FPIs holding more than 50% of their Indian equity assets under management (AUM) in a single Indian corporate group or exceeding Rs 25,000 crore in Indian equity AUM are required to provide detailed disclosures of their holdings.
The proposed increase in the threshold is designed to prevent circumvention of minimum public shareholding (A requirement for all publicly listed companies to have at least 25% of the total outstanding shares for shareholders who are not promoters) norms and other related regulations, particularly concerning large foreign investments that could disrupt market stability. attributed to the substantial rise in daily market turnover. SEBI has stated that when evaluating the potential impact of a large investor on the market, they will consider the size of the market. To measure market size, they will look at a broad indicator like daily market turnover.
Data indicates that the average daily turnover on the National Stock Exchange (NSE) rose by 122% from ₹53,500 crore at the end of FY23 to approximately ₹1.18 trillion by December 2024. This dramatic increase underscores the growing liquidity in Indian markets and highlights the need for regulatory adjustments that align with current market dynamics.
What are Granular Disclosures?
Granular disclosures refer to the detailed information that FPIs are required to provide about their investments in Indian equities. This includes information about the individual securities held, the quantity of each security, and the value of the investment along with economic interests or control in a FPI on a full look through basis. The purpose of granular disclosures is to provide transparency and help regulators monitor the activities of FPIs in Indian markets.
Why is SEBI proposing to increase the threshold?
SEBI is proposing to increase the threshold for granular disclosures to Rs 50,000 crore because of the significant growth in Indian equity markets. The daily market turnover has increased significantly and SEBI believes that the current threshold of Rs 25,000 crore is too low. By increasing the threshold, SEBI intends to protect the interests of small shareholders and ensure a level playing field for all types of investors.
Implications
The proposal to increase the threshold for granular disclosures has several implications for FPIs and Indian equity markets. Some positive implications are:
Reduced Regulatory Burden: The increased threshold will reduce the regulatory burden on FPIs, as they will be required to provide granular disclosures only if their Indian equity AUM exceeds Rs 50,000 crore.
Increased Foreign Investment: The proposal is expected to encourage more foreign investment in Indian equities as FPIs will be subject to less stringent disclosure requirements because of reduced regulatory burden.
Improved Market Liquidity: The increased threshold is expected to improve market liquidity as FPIs will be able to participate more freely in Indian equity markets.
Economic Conditions: The depreciation of the Indian rupee against major currencies has also been cited as a contributing factor to this regulatory change. As FPIs navigate fluctuating currency valuations, adjusting disclosure requirements could facilitate more stable investment strategies.
Regulatory Efficiency: By raising the threshold, SEBI aims to streamline compliance requirements for FPIs while still maintaining oversight over significant market players. This move is expected to reduce the regulatory burden on smaller investors who may not pose the same level of risk to market integrity.
Preventing Round-Tripping: The proposal also seeks to mitigate potential round-tripping activities, where promoters might use FPIs to bypass domestic investment regulations. By increasing transparency requirements for larger investments, SEBI aims to safeguard against such practices.
Despite the Positive reception, there are concerns regarding these changes:
Transparency Risks: Increasing the threshold might lead to reduced transparency in ownership structures among larger FPIs, potentially obscuring important information from regulators and investors.
Market Manipulation: There are fears that larger players could exploit higher thresholds to engage in practices that may manipulate stock prices or influence market movements without adequate oversight.
Regulatory Efficacy: Whether simply increasing thresholds is sufficient to address deeper issues related to market integrity and investor protection.
Conclusion
Market players have welcomed this move, citing increased market liquidity and the recent depreciation of the rupee as contributing factors. The proposal is seen as a positive step towards reducing the regulatory burden on FPIs and encouraging more foreign investment in Indian equities. The proposal is expected to improve market liquidity and reduce the administrative burden on FPIs. However, it is essential to ensure that the increased threshold does not compromise the transparency and integrity of Indian equity markets. SEBI has invited public comments on the proposal until January 31, 2025. It is expected that the proposal will be finalized after considering the feedback from market participants and other stakeholders. Stakeholders will need to carefully weigh the benefits of increased investment flexibility against potential risks associated with diminished transparency and oversight. It is important for all stakeholders to engage constructively on how to best balance growth with accountability in India’s rapidly evolving financial landscape.
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