Capital Markets: Challenges and Developments

Supreme Court seeks SEBI’s explanation FPI Amendments


From UPSC perspective, the following things are important :

Prelims level: Foreign Portfolio Investments (FPI)

Mains level: NA


Central Idea

  • The Supreme Court has asked the Securities and Exchange Board of India (SEBI) to clarify why amendments were made in 2018 to the Foreign Portfolio Investors (FPI) Regulations.
  • These amendments had eliminated crucial clauses aimed at preventing opacity in FPI ownership structures.

Why discuss this?

  • A judicial inquiry report has stated that SEBI’s investigation into allegations against the Adani Group by Hindenburg Research had been hindered by FPI ownership amendments.
  • The report highlighted the challenges faced by SEBI in determining the “ownership” of 13 overseas entities, including the FPIs mentioned in the Hindenburg report, due to the lack of clarity in their ownership chain.

What are FPIs?

  • Foreign Portfolio Investments (FPI) refer to investments made by foreign individuals, institutional investors, pension funds, sovereign wealth funds, and other entities in financial instruments of a foreign country.
  • These investments typically involve the purchase of securities such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other tradable financial assets.

Key characteristics of foreign portfolio investments include:

  • Indirect Ownership: FPIs involve indirect ownership of financial instruments rather than direct ownership of physical assets or businesses. Investors hold portfolios of securities issued by companies, governments, or other entities in the target country.
  • Diversification: FPIs allow investors to diversify their investment portfolios internationally. By investing in different countries and asset classes, investors can reduce risks associated with a concentration in a single market or asset type.
  • Liquidity: FPIs offer high liquidity as they involve trading in financial instruments that can be easily bought or sold in the secondary market. Investors have the flexibility to enter or exit their positions quickly based on market conditions or investment objectives.
  • Market Access: FPIs provide foreign investors with access to the securities markets of other countries. This enables them to participate in the economic growth and potential returns of different markets and take advantage of investment opportunities that may not be available domestically.
  • Regulatory Framework: FPIs are subject to regulations and guidelines set by the regulatory authorities of the target country. These regulations may include registration requirements, investment limits, disclosure obligations, and compliance norms to ensure market integrity and investor protection.
  • Market Impact: Large FPI flows can have a significant impact on the target country’s financial markets. They can influence stock prices, bond yields, exchange rates, and overall market sentiment. As a result, FPIs are closely monitored by regulatory bodies and policymakers.

Key Issue: FPI Regulations Amendment

The Foreign Portfolio Investors (FPI) Regulations were first introduced in 2014 by the Securities and Exchange Board of India (SEBI).

  • Removal of “opaque structure” provision: The 2018 amendments eliminated provisions in the FPI Regulations that addressed opaque structures and required FPIs to disclose every ultimate natural person in the ownership chain.
  • Justice Sapre panel’s observations: The expert committee report stated that the removal of these provisions had put SEBI in a “chicken-and-egg situation” in its investigation of the 13 overseas entities suspected of having opaque structures.
  • Need for information on ultimate economic ownership: The report emphasized that SEBI’s investigation required information about the ultimate economic ownership, rather than just beneficial owners, of the entities under scrutiny.

Supreme Court’s Query and SEBI’s Response

  • Court’s inquiry on the amendments: The Chief Justice asked SEBI to explain the circumstances and reasons behind the changes made to the provisions dealing with opaque structures.
  • SEBI’s assertion on ongoing investigation: The Solicitor General, representing SEBI, stated that the investigation was progressing at full speed and that the agency was working diligently to meet the extended deadline set by the court.
  • Petitioners’ arguments on fatal impact: The petitioners argued that the amendments made in 2018 had rendered SEBI’s current investigation ineffective, as the definition of opaque structure was removed. They claimed that these amendments were intended to prevent fraud exposure.

Court’s Concerns and Request for Explanation

  • Court’s curiosity about the amendments: The Chief Justice expressed the court’s interest in understanding the reasons behind the changes made by SEBI in 2018.
  • Potential impact on the investigation: The court acknowledged the argument that the amendments might restrict SEBI from delving into the layers of transactions, potentially hindering the investigation.


  • The court seeks clarification on the circumstances surrounding these changes and their impact on SEBI’s investigation into the Adani Group.
  • The court’s concern lies in understanding the potential limitations these amendments may have imposed on SEBI’s ability to explore the ownership chain and layers of transactions.

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