Circular issued to identify beneficial owners

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The Securities and Exchange Board of India (SEBI) released a circular on 10 April 2018, which laid down the parameters to identify beneficial owners (BOs) for foreign portfolio investors (FPIs). Pursuant to an interim report, released on 8 September 2018 by the working group constituted under the chairmanship of HR Khan, SEBI held a board meeting on 18 September 2018 and subsequently issued two separate circulars on 21 September 2018, namely the Eligibility circular and the know your client (KYC) circular.

Eligibility circular. The Eligibility circular states that the beneficial ownership criteria as provided under the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (PMLAR), should be made applicable only for the purposes of KYC and not for determining eligibility of FPIs. The circular provides that participation by a single non-resident Indian/overseas citizen of India/resident Indian (NRI/OCI/RI) (including those of an NRI/OCI/RI controlled investment manager) should be restricted to 25% and in aggregate to below 50%. SEBI has further clarified that the above limits will not apply to FPIs investing only in mutual funds in India.

The circular also allows participation by RIs, through the liberalized remittance scheme approved by the RBI, in FPIs that are global funds that have an India exposure of less than 50%. It further states that NRI/OCI/RI should not be in control of FPIs (except for FPIs for which a no-objection certificate has been provided by SEBI). However, FPIs can be controlled by investment managers (IMs), which are owned and controlled by NRIs/ OCIs/RIs provided that: (1) the IM is appropriately regulated in its home jurisdiction and registers itself with SEBI as a non-investing FPI; or (2) the IM is incorporated or set up in India and appropriately registered with SEBI. SEBI has also clarified that a non-investing FPI may be owned and/or controlled by an NRI/OCI/RI.

FPIs have been given two years from the date of the amended regulations. FPI regulations are expected to be amended in line with the Eligibility circular or from the date of their registration, whichever is later, to satisfy the eligibility conditions mentioned under the Eligibility circular.

KYC circular. The KYC circular states that BOs should be identified in accordance with rule 9 of the PMLAR. BOs have been defined as natural persons who ultimately own or control an FPI. The circular prescribes a format for FPIs to maintain a list of BOs. It also provides a format for the FPIs to furnish details of the intermediate shareholders/owner entities (if any), on a look through basis, with holdings equal to and above the materiality thresholds. Such format includes disclosure of names of entities, percentage of holding, method of exercising control, etc. An exception to such identification and disclosure has been provided for entities that are eligible to register as category I FPIs.

Furthermore, the KYC circular states that foreign companies should not be allowed to benefit from the exemption under rule 9(3)(f) of the PMLAR, which provide that it is not necessary to identify and verify BOs of listed companies or subsidiaries of listed companies. FPIs have been given six months from the date of the circular to comply with the KYC circular. If the requirements are not met within the timelines, FPIs will not be allowed to invest further upon the expiry of the timeline until the KYC requirements are complied with.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.