SEBI is the market regulator in India and it has revised Know Your Client (KYC) norms for Foreign Portfolio Investors (FPIs) stating that residents, as well as non-residents, can now hold a non-controlling stake in such entities. SEBI has recently issued revised two circulars pertaining to the KYC requirements and their eligibility conditions for Foreign Portfolio Investors.
These circulars were issued by the SEBI after a panel suggested certain changes to the FPI guidelines that were proposed earlier. The changes have been brought after understanding the concerns of a certain market segment regarding the difficulties that overseas funds might face while ensuring compliance.
With the new KYC norms in place, NRIs, OCIs (Overseas Citizens of India) and RIs (Resident Indians) are now been permitted to hold a non-controlling stake in FPIs. According to the regulator, there would not be any restrictions on NRIs, OCIs, and RIs to manage non-investing FPIs SEBI-registered offshore funds as well as registered investment managers.
On fulfillment of certain conditions, these entities are eligible to be constituents of FPIs. If the assets under the management in the FPI are held by NRI/OCI/RI either singly below 25 percent or in the aggregate form below 50 percent, then such entities would be allowed to be constituents of the FPI. An NRI, OCI or RI can directly or indirectly own a non-investing FPI.
SEBI has further noted that NRI, OCI or RI shall be free from the restriction that they should not be in control of FPIs that are offshore funds and for which no objection certificate has been issued by the board as per the terms of mutual fund regulations.
For compliance, the existing FPIs and new applicants shall be given a time period of two years from the date of new rules coming into force or the date of registration, whichever is later. However, if there is any temporary breach, a time period of 90 days shall be given to ensure compliance.
SEBI further said that a list of beneficial owners must be maintained and provided by the FPIs under category II and III. Beneficial owners are the person who controls or owns an FPI. They are divided into three classes on the basis of their risk profile. The FPIs belonging to high-risk jurisdictions may apply for a lower threshold of 10 percent for identifying beneficial owners and ensure KYC documentation that is applicable to category III entities. SEBI further said that a beneficial owner must not be a nominee of another person.
SEBI further clarified that senior manager officials are the ones who hold a senior management position and take key decisions relating to FPIs must be identified and disclose their personal information.
SEBI stated that where the companies and trust provide services of lawyers, accountants, etc. to FPI must provide the information such as real owners of such service providing entities.
The new rules shall be applicable to the investors of the P-Notes or Participatory Notes. The KYC documentation in relation to category III FPIs shall require an annual audited financial statement or a net worth certificate from the auditor. However, such documents are exempted during investigations or an enquiry.
In relation to the exempted documents, FPIs must submit an undertaking that the relevant documents would be submitted to the designated depository participants or custodians upon demand by regulators or law enforcement agencies.
The custodians should preserve and maintain the records of concerned FPIs for at least five years from the date of cessation of the transaction. In addition, if there a litigation going on, such records must be maintained until the completion of the proceedings.
The regulator shall give FPIs a period of 180 days to comply with new rules. On failure to comply, a further 180 days shall be given to close down their existing positions.
FPIs under category II and III registered prior to the current circular must disclose the list of beneficial owners and other KYC documents applicable.
Former RBI Deputy Governor H R Khan and public comments on the draft proposals headed the panel to prepare the final guidelines.
