Sebi issues revised KYC norms for foreign portfolio investors

Markets regulator Sebi Friday issued revised KYC norms for foreign portfolio investors, wherein resident as well as non-resident Indians have been permitted to hold non-controlling stake in such entities.

Two circulars pertaining to KYC (Know Your Client) requirements and eligibility conditions for FPIs have been issued.

These norms have been put in place weeks after a panel suggested various changes to the guidelines proposed earlier, amid concerns in certain quarters that overseas funds might face difficulties in ensuring compliance. 

NRIs, OCIs (Overseas Citizens of India) and RIs (Resident Indians) have been permitted to hold non-controlling stake in FPIs. There would also be no restriction on them to manage non-investing FPIs Sebi-registered offshore funds as well as registered investment managers, according to the regulator.

These entities would be allowed to be constituents of FPIs subject to certain conditions. If single and aggregate NRI/OCI/RI holding is below 25 per cent and 50 per cent, respectively, of the assets under management in the FPI, then such entities would be permitted to be constituents of the FPI.

According to Sebi, FPIs can be controlled by Investment Managers (IMs) which are controlled and/ or owned by NRI, OCI, or RI. In this regard, the conditions include that the investment manager is appropriately regulated in its home jurisdiction and registers itself with Sebi as non-investing FPI.

Among others, a non-investing FPI 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 FPI shall also not apply to FPIs which are 'offshore funds' for which no-objection certificate has been provided by the board in terms of mutual fund regulations," Sebi noted.

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

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The watchdog said that FPIs 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 done away with for government-related entities that come under Category I FPIs.

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.

Regarding FPIs from 'high risk jurisdictions', the intermediaries may apply lower materiality threshold of 10 per cent 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, 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".

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 said that exempted documents should be provided during investigations or an enquiry.

"In respect of exempted documents, FPIs 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 FPI concerned. In case any litigation is pending, these records should be maintained till the completion of the proceedings.

The regulator has given six months to FPIs 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," the Securities and Exchange Board of India (Sebi) said.

According to the regulator, a circular regarding clubbing of investment limits for FPIs would be issued separately.

In April, the regulator proposed new norms on KYC and beneficial owner identification but several FPIs 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 H R Khan, and public comments on the draft proposals.