The Supreme Court has asked SEBI to explain the FPI Amendments

  • The Supreme Court has asked the Securities and Exchange Board of India (SEBI) to explain why the Foreign Portfolio Investors (FPI) Regulations were amended in 2018.
  • These modifications removed critical language intended to avoid opacity in FPI ownership arrangements.

Why are we debating this?

  • According to a court inquiry report, FPI ownership modifications hampered SEBI’s probe into charges made by Hindenburg Research against the Adani Group.
  • Due to a lack of clarity in their ownership chain, SEBI experienced difficulties determining the “ownership” of 13 overseas organisations, including the FPIs identified in the Hindenburg report.

What are FPIs?

  • Foreign Portfolio Investments (FPI) are investments in financial instruments of a foreign country made by foreign individuals, institutional investors, pension funds, sovereign wealth funds, and other entities.
  • Securities such as equities, bonds, mutual funds, exchange-traded funds (ETFs), and other tradable financial assets are often purchased in these investments.

The following are key characteristics of overseas portfolio investments:

  • FPIs involve the indirect ownership of financial instruments rather than the direct ownership of physical assets or enterprises. Portfolios of securities issued by firms, governments, or other entities in the target country are held by investors.
  • Diversification: Foreign portfolio investments (FPIs) enable investors to diversify their investment portfolios across borders. Investors can lessen the risks associated with a single market or asset type by diversifying across nations and asset classes.
  • FPIs have significant liquidity because they trade in financial products that can be easily bought and sold in the secondary market. Investors have the ability to quickly enter or exit positions based on market conditions or investing objectives.
  • Market Access: Foreign investors can gain access to other countries’ securities markets through FPIs. This allows people to participate in the economic growth and potential returns of various markets, as well as take advantage of investment opportunities that may not be available in their home country.
  • Regulatory Framework: FPIs are subject to regulations and guidelines established by the target country’s regulatory authorities. To promote market integrity and investor protection, these laws may include registration requirements, investment restrictions, disclosure duties, and compliance standards.
  • Market influence: Large FPI flows can have a major influence on the financial markets of the destination country. They have the ability to influence stock prices, bond yields, currency rates, and market sentiment. As a result, regulatory authorities and policymakers actively watch FPIs.

FPI Regulations Amendment is a critical issue

  • The Securities and Exchange Board of India (SEBI) initially implemented the Foreign Portfolio Investors (FPI) Regulations in 2014.
  • Removal of the “opaque structure” provision: The 2018 revisions to the FPI Regulations removed provisions that addressed opaque structures and required FPIs to disclose every ultimate natural person in the ownership chain.
  • Observations of the Justice Sapre panel: The removal of these rules, according to the expert committee report, had left SEBI in a “chicken-and-egg situation” in its inquiry of the 13 overseas businesses accused of having opaque structures.
  • Need for information on ultimate economic ownership: The study emphasised that SEBI’s investigation required information on the firms under scrutiny’s ultimate economic ownership, rather than only beneficial owners.

The Supreme Court’s Inquiry and SEBI’s Response to the Amendments

  • The Chief Justice requested that SEBI explain the circumstances and reasons for the adjustments made to the regulations governing opaque structures.
  • SEBI’s statement on the continuing investigation: The Solicitor General, who represented SEBI, indicated that the inquiry was proceeding at full speed and that the agency was working hard to meet the court’s extended deadline.
  • Arguments of petitioners regarding deadly impact: The petitioners claimed that the 2018 revisions rendered SEBI’s present inquiry invalid because the term of opaque structure was deleted. They claimed that the adjustments were made to protect against fraud exposure.

Concerns of the Court and Request for Explanation

  • The Court’s interest in the amendments: The Chief Justice emphasised the court’s curiosity in learning the rationale underlying SEBI’s modifications in 2018.
  • Influence on the investigation: The court observed that the modifications could prevent SEBI from delving into the layers of transactions, perhaps hampered the inquiry.

@the end

  • The court wants to know what caused these developments and how they affect SEBI’s probe against the Adani Group.
  • The court is concerned about the potential constraints these revisions may have put on SEBI’s capacity to investigate the ownership chain and layers of transactions.
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