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The Securities and Exchange Board of India (SEBI) on September 21, 2018 relaxed the Know Your Client (KYC) requirements norms for the Foreign Portfolio Investors (FPIs).
The market regulator relaxed the norms after considering the interim recommendations of the SEBI working group under the Chairmanship of Harun R Khan, a former deputy governor of the Reserve Bank of India.
The market regulator also stressed that the beneficial ownership criteria in Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules) should be made applicable for purpose of KYC and not for determining eligibility of FPIs.
As per the PMLA Rules, the clubbing of investment limit for FPIs should not be done on the basis of beneficial owner (BO). Accordingly, there will be a separate set of norms for determining conditions where NRIs, overseas citizens of India (OCIs) and resident Indians (RIs) are constituents.
The KYC review, including changes in BOs and their holdings, is done based on risk categorisation of FPIs, according to SEBI norms.
KYC requirements norms for the Foreign Portfolio Investors
• The norms state that in case of category II and category III FPIs from high-risk jurisdictions, the KYC review should be done on a yearly basis.
• Category II and III existing FPIs should provide the list of BOs and applicable KYC documentation within six months from the date of this circular that is September 21.
• If an existing FPI fails to comply with the applicable KYC requirements by the given deadline, the concerned custodian shall not allow such FPIs to make fresh purchases till the time KYC requirements are complied with.
• However, such FPIs will be allowed to sell the securities already purchased by it.
• Such FPI will be allowed to disinvest its holdings within a period of 180 days from the expiry of the timeline.
• In case the FPI remains non-compliant with the requirements even after 180 days from the said deadline, its FPI registration will no longer be valid and it would need to disinvest its holdings immediately.
• The NRIs, OCIs, and RIs will be allowed to be constituents of FPIs as long as a single NRI, OCI or RI holds less than 25 percent and the aggregate holdings by such entities is less than 50 percent of the assets under management of the FPI.
• The NRI, OCI or RI should not be in control of the FPI. However, investment managers of the NRIs, OCIs and RIs will be able to be in control of the FPI, if they are appropriately regulated in the home jurisdiction and registered with SEBI as non-investing FPI.
• A non-investing FPI may be directly or indirectly fully owned and controlled by an NRI, OCI, or RI.
• The restriction that NRI, OCI, or RI shall not be in control of FPI does not apply to FPIs that are offshore funds for which no-objection certificate has been provided by the board in terms of SEBI (Mutual Funds) Regulations, 1996.
• The restrictions on eligibility conditions are not applicable to FPIs investing solely in mutual funds in India.
• Existing FPIs that are not compliant with these norms will be given two years to meet the eligibility criteria. In case, the FPI temporarily breach the criteria, 90 days will be given to meet the conditions.
• In case of FPIs from high risk jurisdictions, the intermediaries can ensure KYC documentation as applicable for category III FPIs.
• There is no need for identification and verification of beneficial owner of entity eligible as category 1 FPI, in case the intermediate shareholder or owner entity is eligible for registration as category I FPI.
• In case of companies or trusts represented by service providers like lawyers or accountants, 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, 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, audited annual financial statement or a net worth certificate from auditor should be obtained. The exempted documents should be provided during investigations or an enquiry.