Sebi asks FIIs for details of 'end beneficiaries'

Move to ensure 10% investment cap isn't breached

Concerned that the 10 per cent individual investment cap in Indian companies is being breached, capital markets regulator Securities and Exchange Board of India has written to all foreign institutional investors (FIIs) to furnish details of their ‘end beneficiaries’. According to sources in the know, the regulator has sent letters to all the FIIs seeking details, including a list of the ultimate beneficiaries and the original sources of capital for their investments in Indian companies.

According to Sebi norms, an FII or its sub-accounts investing through the portfolio or secondary market investment route can own only up to 10 per cent equity in an Indian company.

Prima facie, most investments by foreign investors are below the 10 per cent threshold limit. However, there is a possibility the ceiling could be breached if one accounts for the aggregate holdings routed through different funds or FIIs.

PLUGGING LEAKS

• Sebi wants to ensure 10% individual investment limit
• Fears of foreign investors investing via different channels
• Sebi in the process of collating data 
• Violators may have to liquidate holdings to below 10% levels

“The rationale behind the Sebi asking FIIs to provide details on ultimate beneficiaries is to inspect whether any entity has routed money through different channels to escape the 10 per cent investment limit,” said a person with direct knowledge of the matter. “In cases where there is a straight-forward breach of norms, Sebi may ask those institutions to liquidate their shareholding to the permitted level,” he added. Securities law experts, however, said applying the 10 per cent cap in cases where the investments were coming through the fund route would be difficult.

“One can’t do much where there is a case of overlap where investments are not actively managed. However, if prima facie it appears multiple accounts have seen set up to escape the cap, the regulator can take action,” said Siddharth Shah, principal and head-fund formation, Nishith Desai Associates.

“If an FII is running a fund, which has multiple and board-based ownership and if the same FII is running another fund which has multiple and board-based ownership, the 10 per cent individual cap rule is difficult to apply,” said Somasekhar Sundaresan, partner at J Sagar Associates.

If one collates investments based on the primary source of capital, the aggregate holding could be higher than 10 per cent. Law experts say there is ambiguity with the 10 per cent cap rule as the Sebi’s FII regulations don’t talk about ‘aggregation’. However, investment by FIIs is subject to the Indian government’s guidelines, which have the concept of ‘group’ and ‘aggregation’.

(Inputs from Sameer Mulgaonkar)