In a recent Circular dated 10th April, 2018, the Securities and Exchange Board of India (“SEBI”) has prescribed the Know Your Client (“KYC”) requirements for Foreign Portfolio Investors (“FPIs”).
Background
The KYC requirements of FPIs is guided as per SEBI Circular No. CIR/MIRSD/11/2012 dated 5th September, 2012 and subsequent SEBI Circular No. CIR/MIRSD/07/2013 dated 12th September, 2013 which prescribes risk based documentation for eligible foreign investors classified as Category I, II and III investing under the PIS route.
This Circular further specifies and elaborates on the KYC requirements of eligible foreign investors classified as Category I, II and III investing under Portfolio Investment Scheme (“PIS”) route.
Key Highlights
- Identification of Beneficial Owners
- Beneficial Owners (“BOs”) of FPIs and the materiality thresholds has to be identified in accordance with the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”) based on controlling ownership and control basis where the FPI is having a structure of a company/trust. For partnership/unincorporated association of individuals such identification will be done based on ownership/entitlement.
- FPIs to provide information on real owners/ effective controllers of the companies / trusts which are represented by service providers like lawyers/accountants.
- BOs should not be a nominee of another person, if exercising control through means like voting right, agreement, arrangement etc., which should also be specified.
- BOs should not be –
a). a person mentioned in United Nations Security Council’s Sanctions List notified from time to time;
b). from jurisdiction, which is identified in the public statement of Financial Action Task Force (FATF).
- FPIs under Category II and III are required to maintain a list of BOs and have been instructed to provide a report on the BOs before 10th October, 2018 certifying exhaustiveness of such list in accordance with the format specified in Point 2 (b) of this Circular
- A company which is majorly owned by one or more NRI/PIOs shall not be allowed to make investments as an FPI.
- FPIs and investors as identified on basis of threshold for identification of BO shall not issue bearer shares. If the legal constitution of FPIs or such investors permit issue of bearer shares, then FPIs should certify that they have not issued and do not maintain any outstanding bearer shares and also certify that they will not issue any bearer shares.
In case existing FPIs or their Identified Investors do not conform to the said requirements, they should ensure compliancewithin six months of the date of this Circular, i.e. October 10, 2018.
- KYC Review –
- As per SEBI circular dated September 12, 2013, eligible foreign investors shall be subject to KYC review as and when there is any change in material information/ disclosure.
- It is decided that there should be comprehensive KYC review of FPIs on a periodical basis. The KYC review (including change in BOs / their holdings) should be done based on risk categorization of FPIs.
- In case of high risk clients (including those coming from high risk jurisdictions) it should be done on yearly basis. In case of all other clients, the KYC review should be conducted every 3 years preferably at the time of continuance of FPI registration.
- Exempted documents to be provided during investigations/ enquiry – In respect of exempted documents, FPIs concerned should submit an undertaking to DDP/ Custodians that upon demand by Regulators/ Law Enforcement Agencies, the relevant documents would be provided.
The existing FPIs should provide the said undertaking within six months from the date of this circular, i.e. October 10, 2018.
- FPIs in breach of Regulation 21(7) of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 to ensure compliance within six months from the date of this circular, i.e. October 10, 2018.
Please refer to the hyperlink below for further details on the Circular.
Source: SEBI
