A worker cleans the glass of the Securities & Exchange Board of India in Mumbai, India (Photographer: Adeel Halim/Bloomberg News)

SEBI Issues Revised KYC Norms For Foreign Portfolio Investors

The Securities and Exchange Board of India today issued revised Know Your Client norms for foreign portfolio investors, wherein resident as well as non-residential Indians have been permitted to hold non-controlling stake in such entities.

Two circulars pertaining to the KYC requirements and eligibility criteria for foreign portfolio investors have been issued. These norms have been put in place weeks after a panel suggested various changes to the guidelines proposed earlier, amid concerns that overseas funds might face difficulties in ensuring compliance.

NRIs, Overseas Citizens of India, and Resident Indians have been permitted to hold non-controlling stake in foreign portfolio investors. There will be no restriction on them to manage non-investing foreign portfolio investors, SEBI-registered off-shore funds as well as registered investment managers, according to the regulator.

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These entities would be allowed to be constituents of foreign portfolio investors subject to certain conditions. If single and aggregate NRI/OCI/RI holding is under 25 percent and 50 percent of the assets under management in the foreign portfolio investors respectively, then such entities would be permitted to be constituents of the foreign portfolio investor.

According to the market regulator, foreign portfolio investors can be controlled by investment managers which are controlled and/or owned by NRI, OCI, or RI. In this regard, the conditions include that the investment manager should be appropriately regulated in its home jurisdiction and registers itself with the SEBI as a non-investing foreign portfolio investor.

Among others, a non-investing foreign portfolio investor can be directly or indirectly owned or controlled by a NRI, OCI or RI.

The restriction that NRI/ OCI/ RI should not be in control of foreign portfolio investors shall also not apply to FPIs which are ‘off-shore funds’ for which no-objection certificate has been provided by the board in terms of mutual fund regulations.
Securities and Exchange Board of India.

Existing foreign portfolio investors and new applicants would be given two years from the date of the new norms coming into force or the date of registration, whichever is later. In case of temporary breach, 90 days would be given to ensure compliance.

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The watchdog said that the foreign portfolio investors under category II and III have to maintain a list of beneficial owners and the same has to be provided to it. Further, additional KYC documentation requirements for beneficial owners have been removed for government-related entities that come under Category I foreign portfolio investors.

Beneficial owners are the natural persons who ultimately own or control an FPI. The FPIs have been categorised into three classes based on their risk profile.

With respect to the FPIs from 'high risk jurisdictions', the intermediaries may apply lower materiality threshold of 10 percent for identification of beneficial owners as well as ensure KYC documentation as applicable for category III entities.

There is also a framework for identification of senior managing official of FPIs, beneficial owners of listed entities besides requirements with respect to disclosure of personal information.

According to SEBI, a senior managing official would mean "an individual as designated by the FPI who holds a senior management position and makes key decisions relating to the FPI.”

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In case of companies or trusts represented by service providers like lawyers or accountants, SEBI said that FPIs should provide information of the real owners of those companies or trusts.

If a beneficial owner exercises controls through means like voting rights, agreements, arrangement among others that should also be specified. However, SEBI said that a beneficial owner should not be a nominee of another person.

The new rules would apply equally to those investors using the Offshore Derivative Instruments, popularly known as P-Notes or Participatory Notes. With regard to KYC documentation for Category III FPIs, SEBI has prescribed that audited annual financial statement or a net worth certificate from auditor should be obtained.

However, SEBI also said that the exempted documents should be provided during investigations or an enquiry. "In respect of exempted documents, foreign portfolio investor concerned should submit an undertaking to designated depository participants or custodians that upon demand by regulators or law enforcement agencies, the relevant documents would be provided," the regulator said.

Custodians should maintain KYC records in original for at least five years from the date of cessation of the transactions with the foreign portfolio investor concerned. In case any litigation is pending, these records should be maintained till the completion of the proceedings.

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The regulator has given six months to foreign portfolio investors for compliance to new rules, while the non-compliant investors can be given further 180 days to wind down their existing positions.

"Category II and III FPIs registered prior to this circular (existing FPIs) should provide the list of beneficial owners and applicable KYC documentation within six months," SEBI said.

According to the regulator, a circular regarding clubbing of investment limits for foreign portfolio investors would be issued separately. In April, the regulator proposed new norms on KYC and beneficial owner identification but several foreign portfolio investors had expressed concerns over the proposed changes in rules.

The final guidelines have been prepared by taking into account recommendations made by the panel, headed by former RBI Deputy Governor HR Khan, and public comments on the draft proposals.

Also read: SEBI To Review Foreign Fund Ownership Rules