Relief for FPIs as Sebi eases KYC guidelines3 min read . Updated: 21 Sep 2018, 10:02 PM IST
Sebi said beneficial ownership criteria in PMLA Rules should be made applicable for purpose of KYC and not for determining eligibility of FPIs
Mumbai: The Securities and Exchange Board of India (Sebi) on Friday relaxed know-your-client (KYC) requirements norms for foreign portfolio investors (FPIs).
After considering the interim recommendations of the Sebi working group under the chairmanship of Harun R. Khan, a former deputy governor of the Reserve Bank of India, the capital markets regulator said beneficial ownership criteria in Prevention of Money Laundering (Maintenance of Records) Rules, 2005, or PMLA Rules, should be made applicable for purpose of KYC and not for determining eligibility of FPIs.
“The clubbing of investment limit for FPIs should not be done on the basis of beneficial owner (BO) according to PMLA Rules. Accordingly, there will be a separate set of norms for determining conditions where non-resident Indians (NRIs) and overseas citizens of India (OCIs) and resident Indians (RIs) are constituents," Sebi said.
The KYC review, including changes in BOs and their holdings, should be done based on risk categorization of FPIs, according to Sebi norms. The norms state that in case of category II and category III FPIs from high-risk jurisdictions, the KYC review should be done on a yearly basis.
“Category II and III FPIs registered prior to this circular (existing FPIs) should provide the list of BOs and applicable KYC documentation within six months from the date of this circular," Sebi said.
If an existing FPI fails to comply with the applicable KYC requirements by the given deadline, the custodian concerned shall not allow such FPIs to make fresh purchases till the time KYC documentary requirements are complied with. However, such FPI will be allowed to continue to sell the securities already purchased by it. Such FPI will be allowed to disinvest its holdings within a period of 180 days from the expiry of the timeline. In case the FPI remains non-compliant with the requirements even after 180 days from the said deadline, its FPI registration will no longer be valid and it would need to disinvest its holdings immediately.
The regulator said that NRIs, OCIs, and RIs will be allowed to be constituents of FPIs as long as a single NRI, OCI or RI holds less than 25% and the aggregate holdings by such entities is less than 50% of the assets under management of the FPI. The NRI, OCI or RI should not be in control of the FPI. However, investment managers of the NRIs, OCIs and RIs will be able to be in control of the FPI if they are appropriately regulated in the home jurisdiction and registered with SEBI as non-investing FPI. A non-investing FPI may be directly or indirectly fully owned and controlled by a NRI, OCI, or RI.
Sebi said the restriction that NRI, OCI, or RI should not be in control of FPI does not apply to FPIs that are “offshore funds" for which no-objection certificate has been provided by the board in terms of SEBI (Mutual Funds) Regulations, 1996. The restrictions on eligibility conditions are not applicable to FPIs investing solely in mutual funds in India.
Existing FPIs that are not compliant with these norms will be given two years to meet the eligibility criteria. In case of a temporary breach, 90 days will be given to meet them.
In respect of FPIs coming from “high risk jurisdictions", the intermediaries may apply lower materiality threshold of 10% for identification of BOs and also ensure KYC documentation as applicable for category III FPIs.
“The materiality threshold to identify the beneficial owner should be first applied at the level of FPI and next look through basis shall be applied to identify the beneficial owner of the intermediate shareholder/owner entity. Beneficial owner and intermediate shareholder/owner entity with holdings equal and above the materiality thresholds in the FPI need to be identified through the look through basis," the Sebi circular said. There is no need for identification and verification of beneficial owner of said entity eligible as category 1 FPI in case the intermediate shareholder/owner entity is eligible for registration as category I FPI, it said.
“It is a good step in the right direction but we have to introspect why we should be having stricter norms for NRIs in the first place. If getting clean money is the concern, as it should be, there are better ways to deal with it. We should not be seen to be actively discouraging honest NRIs from investing in India," said UR Bhat, director at Dalton Capital Advisors (India) Pvt. Ltd.