Tougher entry into India for investors from 25 nations in 'high risk' list

Participation in Indian markets will get more difficult for foreign institutions based out of Mauritius – India’s second largest source of Foreign Portfolio Investor (FPI) flows. According to sources, the global custodians have recognised 25 countries including Mauritius, Cyprus and United Arab Emirates (UAE) as ‘high-risk jurisdictions’. Going forward, off-shore funds investing through these countries will have to comply with additional Know Your Customer (KYC) norms.

Currently, the KYC requirements of FPIs are based on the category they fall under. Category I and II FPIs, who are considered low-risk investors, need to provide minimum documentation while Category III FPIs who are unregulated entities are subject to additional disclosures. Going forward, even the sovereign funds and ‘appropriately’ regulated funds coming from these high jurisdictions will have to comply with the additional documentation requirement. 

Further, the norms for beneficial ownership (BO) will also be stricter for these high-risk jurisdictions especially for non-resident Indians (NRIs) and persons of Indian Origin (PIO). According to the Sebi FPI regulations, no NRI or PIO can be the beneficial owner of an FPI and the ownership is determined based on a shareholding test. In other words, no NRI or PIO can own more than 25 per cent in an FPI. However, for these high-risk jurisdictions, the threshold is as low as 10 per cent. Not just the new FPIs coming from these jurisdictions, all the existing funds in violation with these norms will also have to comply. Several FPIs managed by Indian fund managers will have to dilute their stake in the investment vehicles as a result of these new norms.

“There are several big-ticket FPIs whose fund managers are PIOs. They had set up the existing structures only after getting a proper approval from Sebi. However, they are now being asked to divest their stake as new rules have lowered the threshold. Such changes to the law should have exempted the existing structures,” said a custodian.

This tightening of BO regulations comes after the Finance Ministry red-flagged several off-shore funds for being used as money laundering vehicles by Indians. As per the law, Indian citizens cannot participate in the markets through FPI route. The FPI and foreign direct investment (FDI) routes were introduced by the government to attract foreign capital into Indian markets. Investors coming through this route get several tax sops and relaxation from several domestic laws 

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