Market regulator SEBI is revisiting strict disclosure norms for Foreign Portfolio Investors (FPIs) to address three months of sustained capital outflows totaling $29.2 billion. The potential changes under review include revising ownership thresholds for identifying ultimate beneficial owners and relaxing mandates on holding specific numbers of Indian stocks. These steps aim to reduce compliance hurdles for global funds and attract renewed foreign investment.
What Happened
The Securities and Exchange Board of India (SEBI) is actively reviewing its current disclosure framework for Foreign Portfolio Investors (FPIs). This move follows a period of significant selling pressure, with India recording $29.2 billion in cumulative net FPI outflows over the last three months. The regulator is exploring ways to ease compliance requirements that global investors have flagged as significant operational barriers, in an effort to stabilize foreign fund flows.
The Compliance Hurdle
Currently, FPIs face two primary challenges under the existing rules. First, there is a mandate that requires FPIs to maintain a diversified portfolio, often interpreted as needing to hold at least three Indian stocks. This creates difficulties for specialized funds that may want to take large, single-stock bets.
Second, the current framework forces detailed reporting for FPIs that hold more than 50% of their India-focused assets under management (AUM) in a single corporate group. For many foreign fund managers, managing these specific thresholds alongside daily changes in their investment base adds a layer of complexity that has led some to re-evaluate their exposure to Indian markets.
Understanding The UBO Threshold
A key area of discussion is the identification of Ultimate Beneficial Owners (UBOs). The current system requires detailed disclosures for funds meeting specific criteria, with thresholds linked to the Prevention of Money Laundering Act (PMLA) rules.
Reports indicate that SEBI is evaluating aligning these thresholds with global standards, which generally set the UBO limit at 20%, rather than the 10% threshold currently used in some domestic contexts. Investors often find that discrepancies between Indian regulations and global investment norms require them to set up distinct, India-specific legal structures, which increases costs and slows down the investment process.
Why The Rules Are Under Review
The regulator's willingness to re-examine these rules is driven by the urgent need to address the liquidity impact caused by sustained outflows. By potentially moving the 50% concentration limit to apply to a fund's global AUM—rather than just its India-specific portfolio—SEBI may be able to grant more flexibility to large global funds. Additionally, extending exemptions to funds based in more jurisdictions, similar to those already granted to specific US states and Australia, could further reduce the administrative burden.
What Investors Should Monitor
It is important to note that these discussions are in the early stages and have not yet been presented to SEBI’s FPI Advisory Committee. The key monitorable for the market will be official circulars from the regulator confirming the relaxation of these rules. While easing these norms may reduce compliance costs, the actual return of foreign flows will still depend on broader global macro factors, interest rates, and the relative attractiveness of Indian valuations compared to other emerging markets.