The Adani-Hindenburg controversy led to a focus on the gaps in foreign portfolio investor regulations which appeared to allow some entities to conceal the identity of the ultimate beneficiary. A recent consultation paper released by the Securities and Exchange Board of India (SEBI) is an attempt to tighten the disclosure requirements in offshore derivative instruments and investments through segregated portfolios, by making the provisions of the August 2023 circular applicable to them. The circular was applicable to FPIs in general.

The circular says that granular details regarding the natural person owning or having economic interest or exercising control over the FPI should be disclosed to the depository participant if more than half of the FPI’s assets are concentrated in a single group or its total Indian assets exceeds ₹25,000 crore. Making the circular applicable on p-note holders, however, appears pointless. P-notes are issued by FPIs registered with SEBI to foreign investors in other jurisdictions. The subscribers of p-notes are typically hedge funds and other global investors who trade across markets. They prefer speed while making their trades and prefer p-notes due to the ease, it offers. Asking these investors to make onerous disclosures could lead to the closure of this investment channel. SEBI already has strict guidelines regarding the kind of investors who can purchase the p-notes, methods of transfer of these instruments and reporting requirements and so on. These rules are sufficient in ensuring that only serious investors use this channel. While greater disclosure of owners of segregated portfolios is needed, the regulator need not worry about the ultimate beneficiaries of p-notes.

P-notes are no longer a significant source of FPI funds, with share of these instruments in total FPI assets declining from 44 per cent in 2006-07 to 1.9 per cent now. With the total value of p-notes outstanding at just ₹1,34, 633 crore, it is highly unlikely that this route is being misused by Indian promoters. The FPI issuing the p-note has been tasked with collection of information regarding all the holdings of the p-note subscriber and disclosing it to the depository participant. It will be difficult for the issuers to verify if the disclosures made to them are complete since these investors are likely to hold assets across countries.

That said, application of the August 2023 circular on segregated portfolios is important as these multi-level structures are quite opaque and the ultimate beneficial owner can be hard to determine under existing rules. The paper notes that as of July 2024, 35 FPIs held investments through segregated portfolios; of these, one FPI had 86 sub funds. Promoters can hold additional stake in their companies through such structures or support their stock price. Additional disclosures here are desirable and easier to implement.

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