India’s capital market regulator, the Securities and Exchange Board of India (Sebi), is preparing a consultation paper that could loosen the extra disclosure rules foreign portfolio investors (FPIs) face in India, according to a person familiar with the discussions.

The rules in question require FPIs above a certain asset size, or with concentrated equity exposure to a single company or corporate group, to share granular details of the investors in their funds. Sebi is now looking at whether those requirements have gone too far.

The source said the regulator had already sounded out some market participants and fund custodians. The goal, according to the person, is to rationalise the framework without hurting the market in the process.

"It wants to rationalise the rules so that the twin objective, to enhance transparency and prevent circumvention of regulations by FPIs without causing any collateral damage like driving a fund to sell shares to lower its holding, is met."

That final clause is the crux of the debate. A fund forced to sell shares just to dodge a disclosure trigger does not just change its own portfolio. It can move prices, unsettle other holders and send a signal to foreign money that India’s rules are hard to predict.

What the current rules actually say

The additional disclosure regime was introduced in the wake of allegations by US firm Hindenburg Research against the Adani Group. Under it, an FPI must reveal the ultimate beneficial owners, down to the last natural persons, of all investors in the fund if it crosses either of two thresholds.

The first trigger is when more than 50 per cent of the fund’s India equity assets under management sits in one company or a single corporate group. The second is when a fund’s AUM in Indian equities reaches ₹50,000 crore or more.

The disclosure rule also applies if multiple FPIs with common ownership or control together breach those limits. That clause is aimed at funds that might try to split holdings across several vehicles to stay under the radar.

For fund managers, the thresholds are not an abstract compliance question. A fund that breaches them has to open its investor base to scrutiny, and many investors may not want their identities exposed in that way.

The proposed relief

One of the suggestions under discussion is a low threshold for equity holding in a company. Below that level, an FPI would not have to disclose its investors, even if the fund is focused on one or two firms or a single group.

The second proposal targets FPIs with concentrated investments in professionally run companies that have no identifiable promoters, along with public sector undertakings. Under the idea being discussed, those FPIs could be exempted from the additional disclosure requirements.

The source pointed to a specific problem with the current design. Sebi has already exempted certain FPIs, including sovereign funds, public retail funds and university funds. But funds that want to focus on a few stocks as part of their strategy are caught in the detailed disclosure rule.

"Some rationalisation, particularly, deciding an FPI’s maximum holding in a company under which the fund could be spared from additional disclosures," the source said, describing the central fix being weighed.

Why the rules exist in the first place

Sebi is not talking about scrapping the regime. The rules are designed to close several specific gaps. They aim to prevent violation of minimum public shareholding regulation, which requires listed companies to keep a minimum share of their equity in public hands.

They are also meant to stop promoters or connected entities from using FPIs to mask concentrated holdings. Without visibility into who really owns a stake, a promoter could effectively control shares through a foreign vehicle without the market seeing the link.

The rules further target attempts to sidestep takeover norms. And they block circumvention of Press Note 3, which requires government approval for investments from land-bordering countries. Any relaxation will have to keep those protections intact, or the regulator risks reopening the very loopholes the rules were built to close.

That is the tension Sebi faces. Tighten too far and foreign funds may steer clear of concentrated bets in India. Loosen too much and the transparency gains of the past few years could erode.

The bigger policy picture

The timing matters. The government is currently reviewing capital market levies, including long-term capital gains tax (LTCG) and securities transaction tax (STT), and has sought investor and expert views on them. That review is taking place amid an FPI exodus from Indian markets.

Against that backdrop, any move that makes it easier for foreign funds to hold concentrated Indian positions without triggering heavy disclosure obligations would be watched closely. Foreign portfolio money is a major driver of share prices and liquidity, and rules that govern how it can be deployed carry real weight.

If the proposed exemptions become reality, the change could give foreign funds more room to build focused positions in India. That could, in turn, influence inflows and reshape how the market prices large holdings. Whether that happens depends on the final design of the consultation paper and the feedback it generates.

For now, the facts are clear. Sebi is expected to publish a consultation paper seeking feedback on relaxing the regime. The proposals on the table include a low holding threshold and exemptions for certain categories of companies. The regulator has not commented publicly, and the Sebi spokesperson declined to comment on the matter.

The next step will show how far Sebi is willing to go. A consultation paper is not a final rule, but it will set the terms of a debate that matters to every foreign fund with a big bet on Indian stocks.