The move to amend the KYC norms for FPIs is primarily to curb money laundering and round tripping of funds, especially if the investment is routed through a high-risk jurisdiction - typically countries with a known history of funding terrorism activities or money laundering.
The Securities and Exchange Board of India (SEBI) has decided to implement most of the recommendations by H R Khan Committee in the Know Your Client (KYC) and beneficial ownership norms of foreign portfolio investors (FPIs). The HR Khan-led panel was set up by SEBI to advise on redrafting FPI norms for simplification and also to advise on other issues relevant to these investors. What all the panel has recommended and why the capital markets regulator is so keen to amend the KYC norms?
Background – SEBI’s April 10 circular on Beneficial Owners (BOs)
The capital market watchdog had issued a circular on April 10 this year, directing a certain category of FPIs like trusts, banks, mutual funds and investment managers to disclose the names of their BOs within six months. SEBI asked FPIs to disclose everything about beneficial owners from names and address to whether they are acting alone or are in group; their tax residency jurisdiction and percentage and profit ownership.
As per that circular, all non-resident Indians (NRIs), person of Indian origin (PIOs), overseas citizens of India (OCIs) and resident Indians (RIs) can not be a BO of a fund investing in India. A BO is someone who directly or indirectly derives the benefits of ownership.
Later on August 21, SEBI extended the deadline to December 31, after it was requested for a review by market participants, who also asked for additional time for complying. After the extension, foreign investor lobby group Asset Management Roundtable of India (AMRI) said that if SEBI does not amend the norms, it would result in worth $75 billion of investments managed by PIOs, NRIs, OCIs flowing out of India within a short time-frame.
Why the amendments in the first place?
The move to amend the KYC norms for FPIs is primarily to curb money laundering and round tripping of funds, especially if the investment is routed through a high-risk jurisdiction – typically countries with a known history of funding terrorism activities or money laundering.
Khan panel’s recommendations
The high-powered panel has suggested changes on several contentious proposals. It has recommended changes in the guidelines related to the identification of the senior managing officials of FPIs and for BOs of listed entities; as well as in the disclosure of personal information of BOs. It said that all NRIs, RIs and OCIs should be allowed to hold a non-controlling stake and there should be no restrictions on them to manage non-investing FPIs. The committee also said the erstwhile PIOs also should not be subjected to any restrictions.
Moreover, the time to comply with the norms should also be extended by six months, after they are finalised, the panel suggested, while adding that another 180 days time should be given to non-compliant investors to wind down their existing positions. The panel also asked the regulator to remove additional KYC requirements for beneficial owners in case of government-related FPIs.