FPI Compliance Issues Analyzed

Two foreign investors, Elara India Opportunities Fund and Vespera Fund (both based in Mauritius), recently lost a legal challenge against India’s Securities and Exchange Board (Sebi). These funds originally wanted an exception from paying the remaining money for warrants they bought from Indian companies. However, the Securities Appellate Tribunal (SAT) ruled against them, saying they knowingly broke the rules.

Key Points

• SAT rejected FPIs’ attempts for a payment exemption.
• Sebi’s rules require full disclosure of investor ownership.
• FPIs ignored Sebi’s rules about sharing information.
• Failure to comply means losing registration in India.
• Investors spent about $10 billion in Indian securities.
• MTR Foods is planning an IPO next week.

The SAT’s decision means that the FPIs didn’t follow Sebi’s rules. Sebi had made a new rule that required foreign investors to share detailed information about who really owns and controls their money, even if it goes through several companies. This rule was issued in October 2023.

These two funds invested a lot of money – about $10 billion – in Indian companies, including ones like SpiceJet, Felix Industries, and Rushil Décor. They bought these investments after Sebi introduced this new rule. Because they didn’t share all the necessary information, Sebi canceled their permission to invest in India.

The investors argued that they didn’t break the rules accidentally. They said it was a technical problem, but the SAT said this wasn’t true. The tribunal said the FPIs knew exactly what they were doing and chose not to share the information. This would have made it fair for all other investors to follow the rules.

Sebi’s rule was clear: the FPIs had to tell Sebi everything about their investments. The investors waited until very late – almost a year – to tell Sebi about the investments. This delay made it look like they were trying to hide something.

Another company, MTR Foods (owned by Orkla India), will be selling shares to the public next week. This is called an Initial Public Offering (IPO). It could be worth up to $10 billion.

Midwest, a company that sells natural stones, will also start trading on the stock market on Friday. Its IPO was hugely successful, with investors paying more than 90 times the amount offered.

Finally, The Wealth Company Mutual Fund raised around $2 billion by offering new investment funds (NFOs). Most of the money came from smaller cities and towns.

“Compliance isn’t optional; it’s the foundation of a stable and trustworthy financial market.”