Capital markets regulator Securities and Exchange Board of India (Sebi) in April introduced eligibility norms for foreign portfolio investors (FPIs) and new know-your-customer (KYC) rules. The norms inter-alia comprised of various additional disclosure requirements and casted an onerous compliance responsibility on FPIs operating in India.
Considering stakeholder representations and the recommendations of the working group constituted for this purpose, Sebi has recently issued two circulars—one for the purpose of providing the revised eligibility norms for FPIs (eligibility circular) and another circular providing the revised KYC norms (KYC circular).
According to the eligibility circular, the ‘Beneficial Ownership’ criteria provided under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules), would apply only for the purpose of KYC and not for determining the eligibility criteria of the FPI.
PMLA Rules broadly provide that beneficial owner would be a natural person(s), who, whether acting alone or acting together, has a ‘controlling ownership interest’ in the FPI and who exercises control over the FPI. If a beneficial owner cannot be identified in this manner, the senior managing official of the FPI would be considered as its beneficial owner.
The threshold for determining ‘controlling ownership interest’ in an FPI would depend on the legal status of the FPI. In case of an FPI set up as a company, more than 25% ownership of shares/capital or entitlement to profits is regarded as ‘controlling ownership interest’. For an FPI set up as a partnership or any other non-corporate form, the 25% threshold is reduced to 15% ownership of capital or entitlement to profits. For an FPI set up as a trust, the beneficial owner would be the author of trust or trustee or beneficiaries with 15% or more interest in the trust or any other natural person exercising ultimate effective control over the trust through a chain of ownership.
Sebi has permitted non-resident Indians (NRIs), overseas citizens of India (OCIs), and resident Indians (RIs) to be FPI constituents or investors provided that:
• The holding by a single NRI, OCI or RI is less than 25% of the FPI’s corpus; and
• The aggregate holding by NRI, OCI or RI is less than 50% of the FPI’s corpus and that such NRI/OCI/RI should not be in control of the FPI.
Above threshold limits do not apply to foreign citizens investing in India under the FPI route.
The eligibility circular places restrictions on NRI, OCI and RI to control an FPI unless the said FPI is controlled by an investment manager, controlled and/or owned by NRIs, OCIs or RIs, and satisfies any of the following conditions:
• The investment manager is regulated in the home jurisdiction and is registered with Sebi as a non-investing FPI; or
• The investment manager is incorporated or set up under the Indian laws and is registered with Sebi; or
• The FPI is an “offshore fund" for which no-objection certificate has been provided by Sebi basis specific Sebi regulations.
However, the eligibility circular exempts FPIs from the above restrictions, in case the investments are made solely into mutual funds in India.
Existing and new FPIs have to satisfy the above eligibility criteria within a period of two years from the date on which the amended regulations come into force or from the date of registration, whichever is later.
Pursuant to the KYC circular, Sebi requires FPIs to provide a list of their beneficial owners (who are natural persons that ultimately own or control the FPI) in the prescribed format and the information is to be submitted within six months from the date of issue of the KYC circular i.e. by 20 March 2019.
The format includes the beneficial owner’s details such as name, address, date of birth, nationality, tax residency jurisdiction, tax residency number/passport number/social security number, whether the beneficial owner is acting alone or together through one or more person, the beneficial owner group’s percentage shareholding/capital/profit, etc.
The KYC circular requires that disclosures shall be reviewed as and when there is any change in material information/disclosure. In case of Category II and Category III FPIs from high-risk jurisdictions, an annual KYC review is prescribed. High-risk jurisdictions include jurisdictions or countries:
• Where the existence of the money laundering controls is in suspect; or
• Which are active in narcotics production; or
• Where corruption and/or fraud is highly prevalent; or
• That are sponsors of international terrorism; or
• That are tax havens or countries against which government sanctions are applied; or
• Countries that are offshore financial centres.
An FPI may not be allowed to make additional investments until the prescribed KYC requirements are complied with. In case of non-compliance, a further 180-day period is granted to the FPI to disinvest its holdings, post which the FPI’s registration is invalidated and the said FPI would be required to disinvest its holdings immediately.
The KYC circular states the KYC registration agencies (KRAs) shall lock the personal information provided in relation to the beneficial owner, including the senior managing official, of the FPI. Such information would be furnished to intermediaries only on a ‘need to know basis’, using an authentication method and after the KRA gets a confirmation from the FPI or its global custodian.
The above circulars have brought in much needed clarity to the FPIs and have addressed some of the key concerns of the stakeholders. Individuals, especially, NRIs/OCIs acting in the capacity of a beneficial owner in an FPI are required to ensure that the aforesaid regulatory requirements are met within the prescribed timelines.
1. Are people of Indian origin (PIOs) required to comply with the beneficial owner norms for know-your-customer (KYC) purposes?
PIOs are exempted under Sebi’s revised KYC circular from complying with the beneficial owner norms for KYC purpose. However, this exemption does not apply to PIOs who also have OCI cards.
2. Who is a senior managing official?
Senior managing official for the purpose of identification of beneficial owner is defined as an individual designated by the FPI who holds a senior management position and makes key decisions relating to the FPI.
3. Can a nominee of any other person be regarded as a beneficial owner?
No, a nominee of any other person cannot be regarded as a beneficial owner.
Amit Kedia and Niket Shah contributed to this article.
Vikas Vasal is national leader tax–Grant Thornton India LLP. You can send your queries to firstname.lastname@example.org