Sebi’s Eased FPI Disclosure Norms to Drive Inflows but Heighten Market Volatility

Threshold for Beneficial Ownership Disclosure Raised to Rs 50,000 Crore

The Securities and Exchange Board of India (Sebi) has revised its foreign portfolio investor (FPI) disclosure norms, doubling the threshold for granular beneficial ownership (BO) disclosures from Rs 25,000 crore to Rs 50,000 crore. This significant policy change, announced on March 24, is expected to attract fresh offshore capital and boost liquidity in Indian equity markets. However, analysts warn that the move could also lead to higher speculative trading, potentially increasing market volatility.

Why the Disclosure Norms Were Relaxed

• Sebi’s previous threshold of Rs 25,000 crore required FPIs exceeding this asset size to make detailed beneficial ownership disclosures.

• Under the revised framework, only FPIs with assets exceeding Rs 50,000 crore must comply with the stringent disclosure requirements.

• The decision follows concerns raised by global financial institutions, including leading European and US-based banks, which had halted onboarding new P-note clients to avoid breaching disclosure norms.

By raising the limit, Sebi aims to increase foreign capital inflows, which were previously constrained by portfolio concentration norms and regulatory compliance concerns.

Impact on Participatory Notes (P-Notes) and Offshore Investors

• The new regulations are expected to revive the issuance of Participatory Notes (P-notes), a key financial instrument used by offshore investors to gain exposure to Indian equities without registering as FPIs.

• P-notes, also called offshore derivative instruments (ODIs), are issued by large foreign banks with significant Indian operations, allowing global investors to invest indirectly in India’s stock markets.

• P-note issuances had been declining in recent months, with their share of total FPI assets falling from 2.28% in August 2023 to 1.86% in December 2024.

Market Volatility Concerns Amid Increased Speculation

While the move is expected to enhance market liquidity, experts caution that increased P-note activity could lead to more speculative trading.

• Suresh Swamy, Partner at Price Waterhouse & Co LLP, stated:

  “This relaxation provides much-needed headroom for FPIs issuing ODIs. It allows them to cater to client demand without triggering additional disclosure requirements.”

• Kunal Sharma, Partner at Singhania & Co, added:

  “Several major P-note issuers had deliberately kept their portfolio values below Rs 25,000 crore to avoid mandatory BO disclosures. The new threshold allows them to scale operations freely.”

With renewed investor interest in P-notes, concerns over market speculation and short-term volatility have intensified.

India Volatility Index (VIX) Shows Unusual Stability Despite Market Decline

• The India Volatility Index (VIX), commonly known as the market’s fear gauge, has shown unusual stability despite recent stock market corrections.

• Since January 2025, the VIX has declined 12.5%, even as the Nifty 50 has lost nearly 2% this year.

• Typically, VIX and stock indices share an inverse relationship, with volatility rising during market downturns. However, the current low VIX levels raise questions about investor sentiment and market resilience.

Concerns Over Transparency and Regulatory Oversight

While the relaxed norms are expected to attract greater FPI inflows, analysts emphasize the need for robust regulatory oversight to prevent potential risks related to market manipulation and systemic instability.

• Tushar Kumar, Advocate, Supreme Court of India, noted:

  “While this relaxation will bolster market participation and liquidity, it could also enhance volatility. Sebi must carefully balance transparency and systemic risk mitigation while ensuring investor confidence.”

Market Implications of the Regulatory Shift

• Higher foreign investment inflows are expected in the coming months, particularly from hedge funds and institutional investors that were previously constrained by disclosure requirements.

• Short-term market volatility may increase due to greater P-note trading activity and speculative positioning by offshore funds.

• Institutional investors will closely monitor Sebi’s regulatory stance, particularly regarding long-term market stability and enforcement measures to curb potential market manipulation.

The full impact of Sebi’s FPI disclosure relaxation will be closely watched by global investors, as India seeks to maintain its appeal as a top emerging market investment destination while managing the risks of increased speculative trading.