Sebi FPI norms linked to the recent market crash?

In response to a recent 4 percent dip in the Nifty 50 and Sensex benchmarks, market analysts are speculating that the decline may be attributed to foreign portfolio investors (FPIs) adjusting their portfolios to comply with the Securities and Exchange Board of India's (SEBI) additional disclosure norms. These norms aim to prevent manipulation of rules on minimum public shareholding and curb indirect control of Indian companies by overseas entities through a network of shell firms.

What SEBI Wants from FPIs:

SEBI is seeking enhanced disclosures from FPIs to ensure transparency and prevent concentration of ownership. FPIs are required to provide comprehensive details of ownership, economic, and control rights, aiding in the identification of ultimate beneficial ownership.

Who Needs to Make Additional Disclosures:

FPIs whose 50 percent of equity assets under management are invested in a single Indian corporate group, or those that have invested over Rs 25,000 crore in the Indian stock market, are mandated to make these disclosures.

Exemptions:

Certain entities, such as sovereign wealth funds, listed companies on specific global exchanges, public retail funds, and other regulated pooled investment vehicles with diversified global holdings, are exempt from these additional disclosure requirements.

Risks of Concentrated FPI Investments:

SEBI is concerned about concentrated FPI investments, as this may indicate collusion between promoters and FPIs. Instances have been observed where promoters held more than the stipulated 75 percent by parking shares with FPIs sympathetic to them, potentially distorting the true free float of a listed company and increasing the risk of price manipulation.

Quantum of FPI AUM and Deadline for Disclosures:

While SEBI initially estimated the quantum of FPI assets under management (AUM) subject to additional disclosures at Rs 2.6 lakh crore in March 2023, sources suggest the actual amount is lower. Existing FPIs were required to bring down any breach of investment limits by January 29, 2024, or make additional disclosures by March 11, 2024, if unable to meet the prescribed thresholds.

Market Fall and FPI Portfolio Adjustments:

Market observers have speculated that the recent market fall is linked to FPIs adjusting their portfolios ahead of the January 31 deadline. However, it is uncertain whether the adjustment is the sole reason, as foreign investors have sold equities worth Rs 27,830.34 crore over the past week—lower than SEBI's initial estimate.

While the market decline is potentially related to FPI portfolio adjustments, it is essential to consider other factors influencing market dynamics. Genuine FPIs may have valid reasons for selling stakes, and the correlation between the market fall and SEBI's disclosure norms requires careful examination.