Over 600 entities owned by foreign portfolio investors have been barred from buying or selling securities in the Indian markets after they failed to disclose their beneficial owners.
The National Stock Exchange said in a notification that the entities in question failed to disclose the details as part of the market regulator’s know-your-customer requirements. Some of these entities were owned by investment houses such as Pacific Investment Management Co., Ashburton Investments Ltd., and Goldman Sachs Group Inc. Emailed queries to these investment houses remain unanswered.
The action can be traced to a circular Securities and Exchange Board of India issued in April last year in which it released a detailed framework to identify and verify beneficial owners of—or those that own/control—foreign portfolio investors. The circular said that non-resident Indians, overseas citizens of India and persons of Indian origin can’t be beneficial owners of FPIs. Some of these regulations were later watered-down in September over fears that it may lead to outflows. However, exchanges had asked the FPIs that had registered with the market regulator before Sept. 21 to provide their beneficial ownership and KYC documentation by March 20, failing which they would be barred from participating in the markets.
“We’re complying with SEBI regulations. As on date, most FPIs have submitted their UBO KYC documents and are compliant with SEBI regulations,” Rohit Rao, chief communication officer of Kotak Mahindra Group, said in response to emailed queries from BloombergQuint. Some of the entities that have been barred from buying and selling securities are clients of Kotak Mahindra Bank Ltd. “There are some inactive FPIs who in any case were contemplating surrendering their licence.”
If an existing FPI fails to comply with the applicable KYC requirements by the given deadline, the concerned Custodian shall not allow such FPI to make fresh purchases till the time KYC documentary requirements, as applicable, are complied with. However, such FPI shall be allowed to continue to sell the securities already purchased by it. Such FPI shall 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 this requirement 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.NSE Notice
Over half of the entities that have been barred have Deutsche Bank as their custodian, according to the list of FPIs provided to brokers, a copy of which was reviewed by BloombergQuint.
Deutsche Bank has nearly 40 percent share in custodial market for securities in India. Among the other custodians whose clients have been barred include HSBC and JP Morgan Chase Bank. Of the 20 SEBI registered custodians as of March 25, 13 handle assets of over 9,400 foreign entities, while the remaining seven handle domestic institutions. Emailed queries to various custodians remained unanswered. HSBC, JPMorgan and Deutsche Bank declined to comment.
There are three primary issues that have come to light on why over 600 entities exist on this list, a custodian with a foreign bank said on the condition of anonymity.
- Many of the entities whose names have been shared aren’t interested in pursuing these accounts further. Many of their accounts are either dormant or their assets have been redeemed or are left with few assets.
- The ultimate beneficial ownership format requires personal data like name, address and passport numbers of the fund manager or beneficial owner. Many of the companies have refused to part with personal information of such individuals, given that strict privacy laws exist in many countries.
- In many cases the due diligence is either incomplete or is in progress. Till a month ago the compliance level was 30-40 percent. Many FPIs expected SEBI to extend the deadline which didn’t happen, resulting in a last-minute rush for compliance.
Over Rs 30.89 lakh crore of assets in equity and debt securities were held by foreign portfolio investors as of February. Nearly 86 percent of these assets are held by category-II and category-III foreign investors, who were required to comply with the KYC norms.
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