The Securities and Exchange Board of India (Sebi) said this week that its board had “broadly agreed” with the report of a committee that has suggested several changes in the Know Your Client (KYC) guidelines and beneficiary ownership norms of foreign portfolio investors (FPIs), and would implement most of the panel’s recommendations. What did the panel recommend, and why is the regulator keen to amend the KYC norms?
On April 10, Sebi issued a circular directing certain categories of FPIs such as trusts, banks, mutual funds, and investment managers to disclose their beneficial owners within six months. A beneficial owner is a person who, directly or indirectly, derives the benefits of ownership. The circular said that Non Resident Indians (NRIs), Persons of Indian Origin (PIOs), Overseas Citizens of India (OCIs) and Resident Indians (RIs) cannot be beneficial owners of a fund investing in India. The regulator also asked FPIs to disclose names and addresses of the beneficial owners; whether they were acting alone or together through one or more natural persons as a group; tax residency jurisdiction; and the beneficial owner group’s percentage shareholding capital or profit ownership in the FPI.
On August 21, after receiving representations from market participants who sought a review of the guidelines and additional time for complying, Sebi extended the six-month deadline for disclosure to December 31. The regulator also said the issues raised by the stakeholders would be studied by an expert group headed by former RBI Deputy Governor H R Khan. The panel had been set up by the regulator in March to advise it on redrafting FPI regulations for simplification, and to advise on any other issue relevant to these investors.
Following the extension allowed by Sebi, a lobby group called AMRI (Asset Management Roundtable of India) said that not amending the norms would result in $75 billion worth of investments managed by OCIs, PIOs and NRIs, being disqualified from investing in India, and the funds would have to be withdrawn and liquidated within a short timeframe. Sebi rejected these claims as “preposterous and highly irresponsible”.
The regulator wants to tighten KYC norms to prevent money laundering and round tripping of funds, especially if an investment is made via a high-risk jurisdiction. Typically, countries with a known history of money laundering and funding terrorism activities are considered as high-risk jurisdictions. However, Sebi has not named these countries, or issued clear definitions. It has instead outsourced the definition of high-risk jurisdictions to custodian banks, who in the absence of clear directions from the regulator, apply their own sets of standards.
The Khan committee has proposed that NRIs, OCIs and RIs should be allowed to hold a non-controlling stake in FPIs, and no restrictions should be imposed on them to manage non-investing FPIs or Sebi-registered offshore funds. It has recommended that erstwhile PIOs should not be subjected to any restrictions, and clubbing of investment limits should be allowed for well-regulated and publicly-held FPIs that have common control.
The panel has suggested that the time for compliance with the new norms should be extended by six months, after they are finalised, and non-compliant investors should be given another 180 days to wind down their existing positions. It has also asked Sebi to do away with additional KYC requirements for beneficial owners in case of government-related FPIs.
The committee has recommended changes in the norms pertaining to the identification of senior managing officials of FPIs, and for beneficial owners of listed entities. It has suggested changes in the disclosure of personal information of beneficial owners. It has said, however, that all new rules should apply equally to investors using participatory notes (P-Notes).