Shruti RajanPartner
Khyati GoelSenior Associate
Rebecca CardosoAssociate
Key Developments
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Certain foreign portfolio investors exempted from the additional granular disclosure norms
The Securities and Exchange Board of India (SEBI) has eased the additional disclosure framework introduced for certain foreign portfolio investors (FPI) last year (SEBI August Circular). (To read our detailed update on the introduction of this framework, click here.)
FPIs having more than 50% of their Indian equity Assets Under Management (AUM) in a single corporate group will be exempt from making additional disclosures if all three of the following conditions are met:
- The apex company of the corporate group must have no identified promoter. In order to identify such corporate groups, depositories shall publish a list of corporate groups and their respective apex companies having no identified promoters, based on the corporate group repository published by the stock exchanges.
- The FPI must not hold more than 50% of its Indian equity AUM in the corporate group, after excluding the FPI’s holding in the apex company having no identified promoter.
- The composite holdings of all FPIs that meet this 50% concentration criterion (and are thus not exempted) must be less than 3% of the total equity share capital of the apex company
SEBI has directed custodians and depositories to track the utilisation of the 3% limit for such apex companies without an identified promoter, at the end of each day. When this limit is met or breached, depositories must make such information public before the start of trading on the next day. If there are future investment by FPIs in the apex company that meet or exceed the 50% threshold in the corporate group, such FPIs will be required to either realign their investments below the 50% threshold within ten trading days or make additional disclosures as prescribed in the SEBI August Circular.
This move reflects an attempt by SEBI to ease the additional disclosure requirements for certain classes of FPIs that may not merit the increased regulatory scrutiny. However, the 3% threshold means that FPIs who are initially exempt might suddenly find themselves under the disclosure regime based on other FPIs investing in the apex company, thus breaching the 3% threshold. FPIs who had initially qualified for the exemption will be compelled to make additional granular disclosures or realign their positions on short notice due to factors beyond their control, making long-term investment planning difficult.
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Timelines for disclosure of material changes by foreign portfolio investors are proposed to be relaxed to ease the compliance burden
SEBI has approved a proposal to relax the timelines for disclosure of material changes by FPIs. Currently, FPIs must disclose material changes to information provided earlier to their designated depository participants (DDP) within seven working days of such change.
Going forward, it is proposed that material changes will be categorised into the following two buckets:
- Type I material changes will continue to be informed by FPIs to their DDP within seven working days. However, supporting documents for the same, if any, can be provided within 30 days of such change.
- Type II changes will need to be informed along with supporting documents, if any, by FPIs to their DDP within 30 days of the change.
Type I and Type II changes are yet to be listed out by the regulator. However, a SEBI consultation paper issued previously has proposed Type I material changes to be those which would require the FPI to seek fresh registration or which affect any privileges/exemption available to the FPI. A Type II change would include all other material changes.
Categorising material changes and relaxing the deadline for disclosure of material changes will ease the compliance burden that many FPIs face in making timely disclosures within the tight deadline of seven days. A descriptive list of the changes necessitating disclosure shall also alleviate the regulatory ambiguity on which changes precisely require a disclosure to be made.
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Framework for qualified stock brokers expanded to include more brokers to boost investors’ trust in the market
Earlier, stock brokers would get designated as Qualified Stock Brokers (QSB) after meeting certain parameters put in place by SEBI and the stock exchanges, such as number of active clients and trading volumes of the stockbroker. These QSBs are subject to certain enhanced obligations and responsibilities, given the outsized impact they have on the markets and the significant number of investors they service. SEBI has now added three more parameters in order to extend the increased compliance framework of QSBs, by bringing more stock brokers within its ambit.
These three new parameters are:
- compliance score of the stock broker;
- grievance redressal score of the stock broker; and
- proprietary trading volumes of the stock broker who is engaged in client trading activity.
Based on these parameters, SEBI has put in place a formula to identify a QSB. The values arrived at through the application of this formula are to be calculated on an annual basis, and the list of QSBs is to be released by the stock exchanges in consultation with SEBI.
Additionally, to further strengthen compliance and monitoring, stock brokers who otherwise would not have qualified as QSBs can voluntarily designate themselves as QSBs and adhere to the enhanced requirements.
These provisions will come into force in a staggered manner to ensure smooth adoption and effective implementation for all QSBs. Given that QSBs typically have a large volume of clients and are important players in the market, this move is crucial to ensure that the interests of the investors are protected.
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Forex derivative contracts involving the Indian rupee are to be offered only for hedging contracted exposure
The Reserve Bank of India (RBI) issued a circular in January this year, effective from 5 April 2024, stating that forex derivative contracts involving the rupee (INR) can only be offered for the purpose of hedging contracted exposure. While the requirement to establish the existence of underlying exposure will not apply for positions up to USD 100 million (notional value), users would still need to ensure that there is valid underlying contracted exposure that has not been hedged using any other derivative contract. That is to say, if the RBI enquires on the existence of the hedge corresponding to the exposure, users should be in a position to establish the same.
The need to prove underlying exposure has caused concern amongst market participants as many investors will not be able to trade in forex derivatives involving the rupee anymore. Liquidity concerns are expected to arise in the forex derivative market, hampering the ability of investors to hedge their currency risks. The RBI had noted such concerns, and put on hold the operation of the circular until 3 May 2024.
Over the next quarter, SEBI’s efforts to ease compliance burdens for FPIs are expected to have a positive development in the industry, in line with the government’s ethos to enhance the ease of doing business in India. On the adjudication front, given that the Securities Appellate Tribunal (SAT) is now presiding with a full bench, some relief for the tribunal’s clogged docket can be predicted. Several significant matters are slated to be decided by this new full bench and it remains to be seen how SAT will expand and build upon the securities law jurisprudence.
