FPIs: Now, relief from full disclosure won’t be easy for pooled FPIs

This was communicated by the Securities & Exchange Board of India (Sebi) to custodians of offshore funds, two persons aware of the regulatory changes told ET. Custodians are banks and non-bank institutions holding cash and securities on behalf of FPIs.

FPIs impacted by the new rules will have to rejig their portfolios by August 20, failing which they would have to sell off their portfolios in the next six months.

Driven by US short-seller Hindenburg’s allegations against Adani Group, Sebi last year came out with granular disclosure norms. An FPI must reveal the ultimate beneficial ownership of every fund investor, down to the last natural persons, in certain circumstances.

Agencies

Common Portfolio
This is when over 50% of the fund’s India equity assets under management (AUM) comprise of stocks of a single corporate group, or, when the Indian equity AUM of an FPI exceeds Rs 25,000 crore.

In a standard operating procedure (SOP) finalised with custodians, Sebi had also laid down the conditions under which FPIs would be exempted from making such detailed disclosure.

A few days ago, an updated SOP, which tightened the exemption requirement for FPIs structured as ‘pooled investment vehicles’ (PIVs) was shared with custodians, the people cited confirmed.

A PIV has a ‘common portfolio’ across investors – the profits and losses generated by this portfolio are distributed amongst investors based on their proportionate ownership or economic interest in the fund. Many funds are structured as PIVs.

Custodians were given the responsibility (in the earlier SOPs) to verify whether a PIV has a common portfolio from the fund’s prospectus, private placement memorandum (PPM) and offer documents lodged with the regulator.

However, according to the revised SOP shared last week, exemption for PIVs shall be available only if the relevant law (including regulations and circulars issued in terms of the applicable law) governing the entity provides for the key features that capture the ‘common portfolio’ character of the PIV.

These include that contributors to the fund enjoy pari-passu rights (or have equal footing) in the entity; no segregated portfolios (where assets and liabilities are compartmentalised) exist; FPIs update their home country regulators of changes in the offer document; contributors do not have control over the fund’s day-to-day operations; and the investment manager is independent from such contributors.

With this, FPI structured as variable capital companies from Singapore, collected investment schemes from Mauritius, as well as some funds from jurisdictions such as the Cayman Islands may not be readily eligible for exemptions from granular disclosures, once they breach the investment thresholds.

“There were master-feeder structures where, for obvious reasons, the feeder fund(s) and not the master (FPI) fund had a PPM, which rendered certain FPIs ineligible to get the exemption. While this change eliminates such subjectivity, it makes it difficult for the FPIs based in jurisdictions not mentioned under Annexure D (of the SOP) to avail of the disclosure exemption,” said Prakhar Dua, who leads the financial services and regulatory practice at the law firm Nishith Desai Associates.

Even funds pooled in Gift City (IFSC) would not be eligible for automatic exemption if the governing law (under which the fund is formed) does not specify the common pool criteria, which is now specified by Sebi under the updated SOP.

Richie Sancheti, founder of law firm Richie Sancheti Associates, said, “The revised SOP lays out clear attributes that the FPI entity should possess to qualify as a pooled investment vehicle (to claim exemptions from additional disclosures). Instead of an independent assessment by the custodian of the constitutional documents of the FPI, revisions in the SOP now require that the framework law – under which the FPI has been set up – should specifically require that the entity maintain such attributes. This removes subjectivity from such determinations.”

Exemptions from disclosure granted to FPI in terms of an earlier version of SOP will not be available from May 22. Under the circumstances, such FPIs impacted by the new rules shall realign their portfolio on or before August 20.

According to a banker, large FPIs from jurisdictions like the US and Australia would find it easier to get exemptions. Of the 11,000-odd FPIs registered with Sebi, 3477 are from the US, 592 are from Mauritius, 593 from Singapore, 364 from the Cayman Islands and 361 from Australia, according to data with the depository. Since mid-January, the number of funds from Mauritius is down from 604, while those from Singapore has gone up from 571.