How Sebi’s new KYC regulations will affect FPIs

How Sebi’s new KYC regulations will affect FPIs

What did Sebi announce on FPIs?

Sebi eased the KYC norms and eligibility terms for FPIs. After studying the recommendations of a Sebi working group, the capital markets regulator said the beneficial ownership criteria in the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLA Rules), should apply for KYC. It said that clubbing of investment limit should not be done based on beneficial owner (BO). There will be a separate set of norms for determining conditions, wherein non-resident Indians (NRIs), overseas citizens of India (OCIs) and resident Indians (RIs) are constituents.

How Sebi’s new KYC regulations will affect FPIs

What are the major decisions on eligibility for FPIs?

NRIs, OCIs, and RIs can be FPI constituents, if a single NRI, OCI or RI holds less than 25% and the aggregate holdings by such entities is below 50% of the FPI’s assets under management. The NRI, OCI or RI should not control the FPI. Investment managers of NRIs, OCIs and RIs can control the FPI, if they are regulated in the home jurisdiction and registered with Sebi as a non-investing FPI. Such an FPI may be directly or indirectly fully-owned and controlled by an NRI, OCI, or RI. “Offshore fund” FPIs and those investing solely in mutual funds in India don’t fall under the stricture.

How will Sebi norms impact the markets?

According to analysts investors had already factored in Sebi’s new norms, and, therefore, there might not be an immediate impact on investor sentiment.

What are the key KYC norms for FPIs?

The KYC review should be done, based on the risk categorization of FPIs. For category II and III FPIs from high-risk jurisdictions, the review should be done annually. Category II and III FPIs registered prior to the new circular should provide the list of BOs and KYC documentation within six months from the date of the circular. If an existing FPI fails to comply with the KYC norms by the deadline, the custodian shall not let that FPI make fresh purchases till the KYC norms are met. They can, however, sell the securities already bought.

Why were FPIs worried about the earlier Sebi norms?

FPI lobby group Asset Management Roundtable of India earlier said that Sebi’s definition of BO, in line with PMLA norms, if not changed, would lead to the outflow of $75 billion managed by OCIs, PIOs and NRIs, as they would be disqualified from investing in India. On 10 April, Sebi asked category II and III FPIs to provide within six months the list of their BOs, along with their identification and verification. The deadline was extended to December.