[Deergha Meena is a fourth-year student at NALSAR University of Law, Hyderabad]
In 2024, SEBI mandated FPIs that managed equity assets in India exceeding ₹25,000 crore to provide granular-level disclosures on their beneficial owners. In a recent circular, SEBI increased this threshold to ₹50,000 crore, reducing the number of FPIs required to disclose beneficial ownership details. The change, which increases the reporting threshold for granular disclosures of the beneficial ownership of FPIs, is intended to streamline compliance and attract foreign capital. However, easing disclosure requirements can diminish transparency, weaken risk detection mechanisms, and dilute the regulatory safeguard against circumvention of Press Note 3, especially when market size alone cannot justify reduced scrutiny of large FPI exposures.
This post critically examines the implications of this shift, highlighting the risks posed by this measure to market integrity. References have been made to the SEBI FPI Operational Guidelines issued to facilitate SEBI (FPI) Regulations, 2019, to assess the implications of SEBI’s measure.
Eroded Disclosures and Data Quality: Risk, Transparency, Surveillance Breakdown
Previously, FPIs with assets exceeding ₹25,000 crore were required to disclose detailed information on their ownership, including: (1) complete identification of all natural persons who are beneficial owners, (2) entities with common ownership, (3) economic interests and control rights across investment structures, and (4) offshore fund-networks with overlapping management. Now by increasing the threshold, SEBI has effectively narrowed the scope of entities required to disclose these details, thereby reducing regulatory visibility over a larger segment of significant investors.
SEBI’s statutory mandate to protect investor interests and ensure market integrity is operationalized through guidelines which direct Designated Depository Participants (DDPs) – the authorized banks and custodians that onboard and service FPIs. Part A, paragraph 8(iii) of the FPI Operational Guidelines requires DDPs to maintain “adequate mechanisms for reviewing, monitoring and evaluating controls, systems, procedures and safeguards.” By doubling the threshold for enhanced disclosures, SEBI has significantly reduced the visibility DDPs have into large FPI structures, effectively hollowing out their supervisory capability. In the absence of that drill-down transparency, regulators lose the ability to spot coordinated investment strategies, concentration risks, or opaque related-party arrangements, which are precisely the kinds of circumvention the August 2023 Circular by SEBI was designed for, so as to enhance scrutiny. Under the said circular, FPIs whose Indian equity AUM exceeds the prescribed threshold and concentrates over 50% of that portfolio’s AUM in a single corporate group must disclose full look‑through ownership details. Relaxing these requirements at a moment of surging foreign inflows thus weakens SEBI’s supervisory toolkit and undermines market integrity.
The lack of granular ownership details raises concerns about potential concentration risks, undisclosed related-party transactions, and the emergence of opaque investment structures that SEBI has previously sought to eliminate. When multiple seemingly independent FPIs with common beneficial owners invest simultaneously in the same securities, only enhanced ownership disclosure requirements can uncover such coordinated activity and prevent regulatory circumvention. Detailed ownership information is indispensable for identifying concentrations, detecting potential round-tripping (a practice where funds are routed through multiple entities to obscure their origin), and gauging the overall transparency of large investment positions.
Furthermore, the higher threshold risks diluting the regulatory safeguard against circumvention of Press Note 3 (issued by DPIIT on April 17, 2020), which is intended to guard against indirect control or influence by entities from countries that share land borders with India, particularly in sensitive sectors. By allowing FPIs with significant assets but that are under ₹50,000 crore, the circular creates scope to escape detailed scrutiny, which could be exploited by sophisticated investment structures designed to circumvent the intent of Press Note 3. Part A, paragraph 16(i) of the Operational Guidelines mandates stricter scrutiny for FPIs from ‘high-risk jurisdictions’. The higher thresholds reduce scrutiny overall, creating a regulatory inconsistency. The consultation paper preceding this amendment acknowledged this risk but prioritized easing compliance burdens over maintaining comprehensive scrutiny.
Market Expansion and Monitoring Blind Spots
The prioritization of market expansion over financial integrity is particularly concerning in the context of recent market cycles characterized by rapid capital inflows and governance decline.
By raising the disclosure threshold for foreign portfolio investors, SEBI’s market‐monitoring system and the compliance checks performed by DDPs are significantly weakened. Without the timely information that SEBI depends on for a midsize group of investors, potentially manipulative schemes, such as splitting a large stake across several funds, can go unnoticed until after they have driven prices up or down. At the same time, under Part C, paragraph 2.4 of the Operational Guidelines, DDPs are required to combine related fund accounts to enforce limits on how much foreign money can be held in a single company. Lacking ownership details for these midsize investors, DDPs can no longer reliably detect when multiple funds share the same backers, allowing overall holdings to exceed safe levels without being noticed.
The Financial Intelligence Unit–India (FIU-IND) also loses a vital piece of its puzzle. FIU-IND tracks suspicious transactions by linking trades to common owners, helping to uncover money laundering or market-abuse schemes. This challenge is made worse by the fact that a single individual can indirectly control several FPI entities, each structured to remain below the 10% ownership threshold set under rule 9(3)(a) of the PML (Maintenance of Records) Rules, 2005. When a substantial segment of foreign investors does not have to disclose their ultimate owners, trades that belong to the same hidden sponsor appear unrelated, slipping through the cracks of FIU-IND’s analysis.
Addressing Fragmentation: AUM-Based Thresholds
One of the more subtle yet significant consequences of raising the disclosure threshold is the potential for FPIs to engage in asset fragmentation. To avoid triggering detailed disclosure requirements, investors may split their portfolios into multiple smaller funds, a tactic that could undermine SEBI’s ability to conduct comprehensive oversight. SEBI incentivizes “strategic regulatory arbitrage”, where investors deliberately structure holdings just below the threshold to avoid transparency requirements. Each fund may individually fall below the disclosure threshold, but collectively, they can represent a substantial concentration of capital. This directly circumvents the limit monitoring requirements at the investor group level established under Part C.1 of the Operational Guidelines, which mandates that where multiple FPIs belong to the same investor group, the investment limits of all such FPIs taken together shall be clubbed. However, it is to be noted that the enforcement of this provision hinges on adequate disclosure.
While raising the AUM threshold for FPI disclosures may ease compliance for large FPIs, it inadvertently worsens the issue of fragmentation in the Indian financial markets. Relying solely on an AUM-based threshold for triggering enhanced disclosures fails to address the complexities of fragmented investments. The core issue with AUM-based thresholds is that they assume that larger funds inherently pose higher risks or require more granular scrutiny. This perspective, however, overlooks smaller investors who, despite having a lower AUM, could still hold significant influence or control over the market, especially through complex or concentrated portfolios. Relying solely on investors’ total assets ignores risks from smaller, fragmented investments that slip below the threshold and escape regulatory scrutiny. This narrow focus undermines comprehensive market oversight by overlooking diverse FPI practices and their potential impacts. The use of a sole asset-based metric fails to capture the full range of risk factors in India’s capital markets.
Rethinking India’s Disclosure Thresholds
Major jurisdictions employ varied approaches to foreign investor oversight that move beyond pure AUM thresholds, but use other potentially more effective thresholds. For instance, South Korea’s Financial Services Commission, under Article 147 of the Financial Investment Services and Capital Markets Act, mandates aggregation of holdings when foreign investors share common beneficial ownership, directly addressing fragmentation risks. Japan requires any investor, foreign or domestic, crossing a 5% shareholding in a listed company, to disclose beneficial owners (FIEA, Article 27-23; Cabinet Ord. 14-5). Similarly, Hong Kong’s Securities and Futures Commission in Part XV of its Ordinance (Cap. 571) requires foreign investors to disclose ultimate beneficial owners (UBOs) and aggregate holdings of related entities based on common beneficial ownership, independent of absolute portfolio size.
The Financial Action Task Force (FATF), of which India is a member, has consistently advocated for enhanced beneficial ownership transparency as a cornerstone of financial system integrity. Recommendation 24 of the FATF Recommendations, 2012 (updated in 2022) specifically emphasizes the importance of identifying the natural persons who ultimately own or control legal entities. Whereas India ties ownership disclosures to size-based thresholds, it shows dilution in strict compliance.
A more integrated approach, one that supplements AUM considerations with ownership aggregation rules and sector-specific risk-based factors, would better align with international best practices. The recent increase in India’s MSCI weightage, rising to 18.8% in the emerging markets index, has already attracted significant passive flows. Whether additional disclosure relaxation was necessary to maintain this momentum remains questionable.
Conclusion: Oversight Safeguards
While SEBI’s decision to increase the FPI disclosure threshold is framed as a move to improve ease of doing business, it carries risks that could erode market integrity. By reducing transparency, SEBI weakens the very safeguards that ensure fair market functioning and efficient price discovery. A more balanced and effective approach would involve enhancing disclosure thresholds requirements and unified metrics for high-risk FPIs while maintaining streamlined reporting for smaller investors, ensuring both transparency and market efficiency.
– Deergha Meena
