Foreign Portfolio Investors: FPIs push for extended license tenure and CAS in India

Mumbai: Several foreign portfolio investors (FPIs) have urged the Indian capital market regulator to increase the tenure of their licence from 3 to 5 years, introduce closing auction session (CAS) which exists in some of the leading markets, spare large private funds from granular disclosures, and review the threshold that triggers the rule to reveal the identities of the last natural persons behind the entities that invest in the funds.

Disclosure Regime

Every three years offshore funds have to pay a fee and share necessary details to renew their registration with the Securities & Exchange Board of India (Sebi) and trade on the Indian stock exchanges. Given the stricter disclosure regime and the requirement to quickly inform the regulator of all material changes, fund managers and administrators feel that the renewal period should be increased to at least 5 years.

The funds have also put across their views to bring in CAS, which is held after the regular trading hours, to arrive at more representative closing prices for actively traded securities and thus reduce the tracking error for passive funds whose portfolios mirror the indices.

Although not fool-proof, CAS is generally considered a more accurate mechanism than the volume-weighted average price (VWAP) for calculating the closing prices based on the last 30-minute trades. CAS exists in the US, Japan, Hong Kong, and some of the European markets. Last year, Sebi released a consultation paper on CAS.

In VWAP, an odd trade in the last 30 minutes can cause a mismatch between the performance of a fund (whose net asset value or NAV is calculated based on the trade price) and the market’s performance based on the closing price (which may end up higher due to a large single trade). Compared with VWAP, the price at which the maximum number of shares of a scrip is traded during CAS is taken as the closing price. The latter, considered less volatile, is not influenced by some large freak trade shortly before the closing bell.

Under the Sebi disclosure norms, FPIs holding more than 50% of their Indian equity assets under management (AUM) in a single Indian corporate group, or funds that individually, or along with their investor group, hold more than ₹50,000 crore of equity AUM in the Indian markets, are required to disclose the last natural persons of all investors in the funds. However, FPIs such as sovereign wealth funds, public retail funds, and certain pooled investment vehicles among a few others are exempted from additional disclosures.

Some of the FPIs in the meeting had said that large private funds should also be freed from extra disclosures. According to Rajesh Gandhi, partner at Deloitte India, “An exemption from providing granular details could be considered for non-retail funds which have a wide investor base similar to the erstwhile broad-based fund concept.”

Sharing the view, Richie Sancheti, founder of the law firm Richie Sancheti Associates, said, “If a fund is under credible regulatory supervision and has a wide investor pool, the risk of it being a front for one entity is low. Sebi’s own SOP (standard operating procedure) acknowledges this by exempting certain regulated pooled vehicles. Extending this logic, a well-regulated, broadly held private fund could justifiably be given leeway, too. These funds share many characteristics with exempt public funds (wide investor base, regulated status of the fund manager).”

Other Requests
About the other ask from FPIs for a longer validity in renewal cycle, he said the core information that funds must provide at renewal (ownership structure, jurisdiction, etc.,) doesn’t typically change drastically in three years-and if it does, regulations require prompt updating of material changes. The savings on regulatory bandwidth and ease-of-doing-business could also help reinforce the image as a well-regulated yet investor-friendly market, said Sancheti.

Fund advisors and intermediaries believe that while the regulator would probably be reluctant in relaxing the 50% threshold criteria for extra disclosures, allowing a longer renewal cycle could be more feasible. According to Prakhar Dua, principal (funds, asset management and regulatory practice) at IC Universal Legal, “While Sebi’s objective to prevent violation of the minimum public shareholding is well appreciated, it should provide some flexibility on the concentration criterion. For instance, offshore funds that are not directly registered with their domestic regulators but are deemed to be regulated through their registered advisors/managers, should be allowed exemption from additional disclosure norms.”