Foreign Portfolio Investment SEBI Registration

Revision of KYC norms for FPIs (Foreign Portfolio Investors) by SEBI

KYC norms for FPIs

To provide relief to the FPI (Foreign Portfolio Investor), SEBI came out with the revised KYC norms for FPIs & eligibility criteria for FPIs.

SEBI comes out with revised KYC Norms for FPIs

In September 2018, SEBI issued revised KYC norms for FPIs (Foreign Portfolio Investors). Under this, Indian residents, as well as non-resident Indians, can hold a non-controlling stake in FPIs.

SEBI issued two circulars, one is related to KYC norms, and another is about eligibility criteria for FPIs. Before the revision of these norms, various changes have been suggested to the proposed guideline earlier. SEBI clarified the process of identification of Beneficial Owners (BO) for FPIs.

Now Indian residents, Non-Resident Indians and Overseas Indian citizens can hold non-controlling stake in FPIs. As per the SEBI, now there will be no restriction in managing non-investing FPIs, SEBI-registered offshore funds & registered investment managers.

What has been issued by SEBI on FPIs?

For FPIs, KYC and eligibility norms have been eased by the SEBI. SEBI has prescribed that for KYC, beneficial ownership criteria in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules) should be applied. Clubbing of investment limit will not be on the basis of beneficial owner for FPIs.

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Major Decisions by Regulator for FPIs

On the basis of certain conditions, such entities would be allowed to be constituents of FPIs. Such entities would be permitted to be constituents of FPIs in case the holding of Indian Residents, Non-Resident Indians and Overseas Indian citizens is less than 25% (single holding) & 50% (aggregate holding) of the assets under management in FPIs.

FPIs can be controlled by Investment Mangers who are owned by Indian Residents, Non-Resident Indians and Overseas Indian citizens, as per SEBI.

In relation to this, Investment manager is regulated in their home jurisdiction and registers themselves as non-investing FPIs with SEBI.

SEBI reported that “The resident 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.”

What are the major KYC Norms for FPIs?

On the basis of the risk profile, FPIs have been categorized into three categories;

FPIs under category II and III have to maintain a beneficial owner list. While, government related entities which fall under the FPIs category I have already been done with the additional KYC documentation. Beneficial owners are the one who control an FPI. In case of a KYC documentation of FPIs category III then there is a requirement of obtaining annual financial statement or a net worth certificate from the auditor.

Besides the disclosure requirements of personal details, there is an identification framework for the senior officials of FPIs and beneficial owners of listed entities.

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Information about the real owners should be provided by the FPIs where there is a company or trust which is represented by lawyers & accountants.

However, if the beneficial owner exercises voting rights, and enters into agreements or arrangements, then it should also be specified. These rules will also be applicable to investors using participatory notes.

The regulator clarified that exempted documents would be provided at the time of investigation or inquiry. For this, an undertaking should be submitted by the FPIs to the designated depository participants that relevant documents would be provided at the demand of the authority.

KYC documents should be maintained for at least five years by the custodian from the date of the cessation of the transaction with the concerned FPI. While in case of pending litigation, till the completion of proceedings, records should be maintained.

As per the regulator, a separate circular will be issued regarding the clubbing of investment limits for FPIs.

Why FPIs were not satisfied with the earlier norms of SEBI?

As per the FPIs, it could lead to the outflow of money managed by non-resident Indians and overseas Indian residents as they would be disqualified from making investments in India. Within six months FPIs Category II & III should provide the beneficial owner list and applicable KYC documentation as per the regulator; however, the deadline was extended to December.

Eligibility Conditions for FPIs

Subject to the following conditions RIs, NRIs and OCIs should be permitted to invest in FPIs:

  • Contribution by RIs, NRIs and OCIs should not be more than 25% of holdings from single RIs, NRIs and OCIs.
  • Contribution by RIs, NRIs and OCIs should not be more than 50% of the holding aggregate of investment by RIs, NRIs and OCIs.
  • RIs, NRIs and OCIs should not be in control of FPI.
  • There is no restriction on NRI, OCI, and RI to manage non-investing FPIs.
  • Investment manager is regulated in their home jurisdiction and registers themselves as non-investing FPIs with SEBI.
  • To the existing FPIs and fresh applicants, a period of two years would be given to them from the date the norms came into force or the registration date, whichever is later. However, 90 days time period would be given in case of a temporary breach to ensure compliance.
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What will be the impact of these norms on the market?

As per the analysts, there might be no immediate impact on investor sentiment.

The Bottom Line

This circular has come into force to ease the KYC concerns. To access the circulars issued by the SEBI specifying the KYC norms & eligibility conditions for FPIs, you can visit the website of SEBI.

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