Offshore asset managers set to approach PMO for clarity on KYC guidelines

A group of offshore asset managers plan to write to the Prime Minister’s Office (PMO), to seek clarity on the impasse pertaining to know-your-client (KYC) guidelines proposed by the Securities and Exchange Board of India (Sebi) in its circular on April 10.

In the past few months, the regulator had received representations from several market participants, asking it to review the proposals and grant additional time. 

In a note put up this week, Sebi clarified that a working group, under former Reserve Bank of India governor H R Khan, would look into the issues raised in the representations made to the regulator. It added that a further view on the matter would be taken up after the group's recommendations are heard. 

The regulator has deferred the compliance date to December 31.

The KYC circular for foreign portfolio investors (FPIs) has sent non-resident Indians, as well as custodians and global investors, into a tizzy over the way it has been worded. Experts suggest there is little precedence of such restrictions in other countries.

At the heart of the circular is the mandate that non-resident Indians (or NRIs), along with PIOs/OCIs, cannot be beneficial owners (BOs) of FPIs. The threshold for identification of beneficial owners of FPIs on controlling ownership interest is 25 per cent in case of companies, and 15 per cent in case of partnership firms. For high-risk jurisdictions, the threshold is lower at 10 per cent.

Several FPI managers are now restructuring their offshore operations to eliminate Indian resident ownership.

High-risk countries include those known for terrorism and fraud, where the existence of money laundering controls is suspect, and banking secrecy or corruption is high. Sebi has now asked the custodians to follow their own processes to identify high-risk jurisdictions and review it periodically.

The definition of BO has to be interpreted together with the criterion provided in Rule 9 of the PMLA Rules, whereby a BO would be a natural person or persons who, whether acting alone or together, have controlling ownership interest or control over the FPI. If a BO cannot be identified in this manner, the senior managing official (SMO) of the FPI would be deemed to be its BO.

Market watchers are hoping Sebi will tweak the regulations to differentiate between NRIs and PIOs/OCIs, excluding the latter from restrictions of the April circular. This will not be easy, however, given the all-encompassing definition of NRIs. The other worry is that clubbing the investment limit for FPIs based on the identity of BOs may jeopardise billions of dollars coming into India from offshore funds. 

Custodians of FPIs, as well as industry lobby groups, have already written to the regulator raising privacy concerns arising out of the circular. FPIs have to disclose BOs' details such as address, date of birth, tax residency number, social security number and passport number. 

Investment firms globally are not comfortable with sharing personal information of their employees, and no one is quite sure if India has the right infrastructure in place to ensure adequate security.
KYC Conflict

  • Offshore asset managers to approach PMO for clarity on KYC norms
  • Sebi has received representations from several market participants to review proposals
  • Will review proposals in consultation with group headed by HR Khan
  • The regulator has deferred the compliance deadline to December 31
  • FPI managers restructuring offshore operations to eliminate Indian resident ownership and control
  • Clubbing investment limit for FPIs based on identity of BOs a concern

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