Indian market regulator Sebi made changes to the know your customer (KYC) framework for Foreign Portfolio Investors (FPIs) through a circular on April 10, 2018, to simplify the mechanism to identify and report on the beneficial ownership of FPIs.
The move, which is part of the regulatory body's and the government's efforts to curb money laundering activity, comes as a relief for Designated Depository Participants (DDPs), which have consistently faced difficulties while determining the beneficial ownership of FPIs and obtaining KYC documentation.
The circular provides that a beneficial owner would be identified in accordance with the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
For determination of beneficial owners, a materiality threshold has been prescribed. In case of a company, a person holding 25% or more will be considered a beneficial owner and in case of a partnership firm, trust, or unincorporated association of persons, any person holding ownership interest of 15% or more will be considered a beneficial owner.
However, if the FPI is resident in a high-risk jurisdiction as per the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) norms prescribed by Sebi, regulated intermediaries are allowed to apply a lower materiality threshold of 10% and obtain KYC documentation accordingly.
The changed regulations are applicable to fund manages of India origin who have more than 15 percent economic interest in a fund or AMC.
Geosphere Capital Management managing partner Arvind Sanger, slammed Sebi's directive for barring foreign funds from being controlled by a persons of Indian origin (PIO) or non-resident Indian (NRI)."We are shocked that Sebi has come out with a circular a month ago and the Finance Ministry either forced it or blessed it. We are hopeful that Piyush Goyal has a much clearer understanding of issues in my opinion," Sanger said.
Nandita Parker, Managing Partner at Karma Capital, said more than 75 India dedicated funds will be impacted by Sebi's April 10 circular. The directive regarding this circular came from the Finance Ministry, she added.
“This kind of gunshot policy making is very counterproductive. It is time to properly look at how policies should be formulated so that this kind of discrimination, which is so blatant and awful, should not happen,” Parker told CNBC-TV18.
She said around $15-20 billion will be impacted because of this regulatory move.
Parker also called for consistency in foreign investment policy, and said such directives send the wrong message to global investors.
“I do not see the logic of coming out with a circular without having consultations with stakeholders and at least getting 360 degree views, which should be a practice followed in future,” said Sudhir Kapadia, India tax head at Ernst & Young.The government needs to clearly define ‘high risk’ jurisdictions, Kapadia added.
Morgan Stanley analysts backed the market regulator's move and said, "improving governance standards and greater transparency could engineer higher cross border and domestic flows given the improving expectations on returns."
Sridhar Sivaram, investment director at Enam Holdings said the regulator's circular will have almost no impact at all, and added only some of the small funds will be affected.
"Most FPI’s are structured as a trust or a corporate, and the threshold limit for a NRI to be termed as beneficial owner is 25%. None of the large India dedicated funds have a single NRI," Sivaram said.