SOP for FPI custodians on the cards to remove regulatory arbitrage

The Securities and Exchange Board of India (Sebi) is in the process of issuing a standard operating procedure (SOP) for designated depository participants (DDPs) regarding disclosures and onboarding of foreign portfolio investors (FPIs), according to a regulatory document seen by Business Standard.

DDPs act as a link between the markets regulator and overseas investors.

The SOP, framed in consultation with the industry, aims to bring consistency across all players and avoid any form of regulatory arbitrage.

This assumes significance as the new disclosure norms aimed at certain FPIs will become operational soon.

Experts are of the opinion that the move will also discourage the practice of DDP shopping — akin to rating shopping, where an issuer of debt selects a credit rating agency that would give it the most favourable rating.

“Some commentators have suggested that in order to have consistent practices across the industry and to avoid regulatory arbitrage amongst DDPs, an SOP may be prepared and followed by all DDPs,” Sebi stated in a recent document on the process of formulating the new FPI disclosure norms.

“In this regard, it may be stated that Sebi has already engaged with DDPs for developing such an SOP,” it said.

Recently, the Sebi board approved stricter disclosure norms for FPIs with high exposure to a single corporate group or those with above Rs. 25,000 crore equity holdings in India.

The idea of formulating an SOP emerged during consultation and finalisation of the new disclosure framework.

The SOP will be based on the principle of trust-but-verify and will aim to reduce instances of FPIs breaching investment thresholds or trying to circumvent disclosure requirements.

An SOP will bring such breaches to light and will address legitimate challenges of onerous regulatory requirements.

“There is no SOP right now for DDPs to be followed.

“We are also awaiting guidelines and fine-prints from Sebi on how to operationalise the new disclosure norms.

“At this stage, there are a few grey areas like that in exemptions and public retail funds.

“We haven’t yet reached out to our FPIs for additional disclosures,” said an official at a large bank-backed DDP.

At present, FPIs may choose custodians based on procedural easiness, multi-jurisdiction presence, size of clients managed, or even based on the reach of the DDP within Sebi for seeking time-bound responses on queries.

Some FPIs prefer banks based out of their home jurisdictions as their DDPs, given their existing relationships.

“On the procedural aspect, some custodians may take a lenient approach with respect to timelines for issuing new FPI licences.

“On a fund level, smaller DDPs may also have a faster turnaround and are more proactive than the ones who offer services in multiple jurisdictions.

“A standard procedure for bigger and smaller players alike may incline in favour of the bigger players,” said Anand Singh, founder, Elios Financial Services, and a member of Capital Market Task Force, FSC Mauritius.

Some custodians said the rule change could impact FPIs who have registered in India with the sole objective of investing in a single company, particularly in the new-age sector.

Industry players believe despite an SOP, practices might continue to differ at different DDPs.

Currently, the processes between SWIFT-enabled FPIs and those without it tend to be different, they highlighted.

“The SOP framework is an excellent initiative of Sebi and this has very few parallels globally.

“A standard practice will not only ease the access for FPIs but also derisk the market,” said Viraj Kulkarni, founder, Pivot Management Consulting.

Sebi has provided certain exemptions to FPIs from additional disclosures for public retail funds.

The SOP may also clarify the identification of such funds for DDPs in certain jurisdictions.

An analysis of FPI shareholding data shared by Prime Infobase shows that there are close to 100 FPIs who have single group exposure of 50 per cent or more.

The total holdings of these FPIs stood at Rs. 1.2 trillion at the end of March 2023 quarter.

Furthermore, 51 FPIs had all their investments towards a single corporate group.

Levelling the field

• Sebi already engaging with designated depository participants (DDPs) on SOP for consistent practices
• Framework to be based on the principle of trust-but-verify, aimed to identify circumvention of disclosure requirements
• Currently, some custodians may take a lenient approach in procedures, say experts
• Custodians awaiting notification on new norms for FPI disclosures for clarity on grey areas

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