When venturing into new markets, be it as a result of a change in strategy, a new mandate or M&A, there is a lot at stake when it comes to shareholding disclosure. Our recent Let's Talk: LEADR webinar took a closer look at four key regions: India, Japan, the EU and the US to dig a little deeper. Region is one of the five pillars of the Shareholding Disclosure LEADR framework and sets out what it takes to expand into new economic areas, highlights the importance of deep, local knowledge, and expands on the sort of caveats to be anticipated in the process.
Here are some of the big takeaways from the panel discussion:
In India, SEBI has been closing loopholes
India is one of the fastest growing investment opportunities globally and its government is investment-focused so is of great interest. However, a certain scandal involving a large Indian manager has led the Securities and Exchange Board of India (SEBI) to issue new rules to close up potential shareholder disclosure loopholes for Foreign Portfolio Investors (FPIs). The two main areas for foreign investors focus on two different aggregation-based rules.
Firstly, a requirement that no more than 50% of a FPI’s Indian AuM can be concentrated within a single Indian Corporate Group. More than 6000 issuers are separated into more than 4000 different groups, making this task nearly impossible to do without automation.
As a result, even an incredibly small investment can trigger this rule.
The second is a threshold for holding significant market value (INR250bn (~US$3bn)) in Indian-listed equities of a FPI group's holdings of equity listed on Indian markets. When it comes to the calculation of these holdings, a FPI group must aggregate all of its Indian AuM with any other FPI in the same group.
For FPIs who breach these thresholds, granular disclosures that incorporate individual interest must be made. Failure to do so will result in a forced liquidation of assets and surrender of registration. Just as swiftly as these rules came into effect is SEBI willing to remove investors from the market entirely who fail to comply.
If it moves in Japan, think disclosure
A market experiencing an uptick in popularity, foreign investment inflows in Japan have recently topped US$30 billion dollars. With that comes an adherence to the complex rules and laws Japan has in place for shareholding disclosure, sensitive industries, and Foreign Direct Investment (FDI).
Japan has potentially the most advanced sensitive industries and foreign investment regime in terms of classification and nuance. Yes, the usual industry-related disclosures, approval and restrictions exist. However, on top of that, there is the Foreign Exchange and Foreign Trade Act - FEFTA for short - adding layers of complexity, bolstered by amendments made as recently as 2020.
FEFTA operates by comparing three investor types - Foreign Financial Institutions, General Investors, and State Owned Enterprises - as they relate to three issuer types - (1) Non-designated business sectors, (2) Non-core designated business sectors, and (3) Core designated business sectors. The Japanese Ministry of Finance has allocated each issuer to one of these types. The result? A three-by-three matrix of varying thresholds and reporting requirements for foreign investors. Some requirements are so stringent that they require a disclosure at every movement in position, both up and down.
This is only one aspect of Japan’s complete list of requirements and hurdles, and doesn’t include swinging thresholds or the country’s Special Reporting System. Unsurprisingly, investing in Japan requires an expert level of regional knowledge.
EU wants mandatory FDI screening
The Russia-Ukraine war and cybersecurity threats, has led the EU to bring in a number of changes, one of which includes advancements in the FDI screening regime.
The proposed regulation would make it mandatory for all EU countries to adopt FDI screening mechanisms and set out the practices and procedures that EU countries must follow. In comparison, the current regime isn’t mandatory, nor does it specify a lot of the details required for member states to cooperate effectively.
FundApps is keeping a close eye and has advocated for a standardisation of forms, consistency of screening mechanisms, standardisation of the definition of a foreign investor and more to the EU throughout this process.
US goes big on Short Selling
Given the changes bearing down on the US market courtesy of the SEC, we’ve already hosted some other popular webinars on that topic alone. As a quick summary, the changes are:.
- Accelerated the filing deadlines for Schedules 13D and 13G beneficial ownership reports
- Expanded application of Regulation 13D-G to certain derivative securities
- Clarification of the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations
- Requirement that Schedules 13D and 13G be filed using a structured, machine-readable data language
The new US Short Selling rule and corresponding Form SHO will require certain institutional investment managers to report short sale related information to the SEC on a monthly basis.Expected to have far reaching impacts well beyond the US, the compliance date for these changes is as early as September.
Whether the result of a new strategy or new portfolio manager mandate, investing globally is a challenge. With limited consistency across reporting requirements, proprietary frameworks designed to protect national interests, and regulatory changes in response to localised events, there won’t ever be a playbook that can be universally applied. Each area is unique in its hurdles and we are here to help.
We also want to say a big thank you to all of our panel experts for their invaluable contributions - watch the full webinar here to hear their insights.
