Explain delay in disclosure of ultimate beneficial owners: Sebi to FPIs

The Securities and Exchange Board of India (Sebi) has sought an explanation from foreign portfolio investors (FPIs) for the delay in providing details of ultimate beneficial owners (UBO) under its new disclosure norms.
 

Such funds must provide details of foreign investors who make collective investments in offshore schemes. 

According to sources, several FPIs showed their apprehension in providing beneficial owner details. Beneficial owners are natural persons who ultimately own or control an FPI.

According to sources, the regulator has initiated inspection of the custodians of these FPIs to check why they are unable to comply with the beneficial ownership criterion and related know-your-client (KYC) documentation, according to the anti-money laundering laws.

Further, the regulator wants custodians to find out the acceptable route for naming the beneficial owners.

“The regulator has formed an expert team to examine the KYC compliance mandated for FPIs. Recently, the regulator reached out to custodians seeking explanation about not naming the beneficial owner,” said a regulatory source.

Sources say that Sebi wants to keep a tab on persons who are into activities such as money laundering and terror funding, and have bad intent to hide behind these institutions.

Rajesh Gandhi, partner at Deloitte Haskins & Sells LLP, said, “Under the Prevention of Money Laundering Act, it is critical for the regulator to know the ultimate source of funds and persons who are controlling the funds. So, identification of ultimate beneficial owner is mandatory. I suppose Sebi’s view is that UBOs should not hide behind a maze of complex fund structures and come clean.”

However, for some FPIs, which operate omnibus structures, giving out details is difficult as they are obliged by the confidentiality clause, Gandhi said.

Sebi, on its part, has made changes to ease the pain by defining a senior management official and doing away with clubbing investments based on common control. So, complying with the revised guidelines should become easier. 

However, it has put in place certain disclosure rules to have better transparency and keep a check on the bad money flow.

Sebi, in its September 2018 circular, said that FPIs have to comply with the beneficial ownership criterion under PMLA provisions and should be made applicable for the purpose of KYC.

According to PMLA rules, the beneficial owner could be an investor or a shareholder of a fund house who can exercise the control over the FPI. 

If an FPI is a company, the ownership threshold is 25 per cent and 15 per cent if it is a trust or partnership.

FPIs under category II and III have been asked to maintain the list of beneficial owners provided to the market regulator. Further, the additional KYC requirements for beneficial owners have been done away with for government-related entities which fall under category I.

Sebi rule says that if an existing FPI fails to comply with the applicable KYC requirements by the given deadline, the custodian concerned will not allow such FPIs to make fresh purchases till the time KYC documentation requirements are complied with.

However, such FPIs will be allowed to continue to sell the securities already purchased. Such FPIs will be allowed to divest their 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 sell its holdings immediately.

Sebi has set March 21 as the deadline for complying with the norms.

Beneficial owner disclosure woes

Sebi wants to know the ultimate source of funds invested in FPIs

FPIs should share details about persons who are controlling the funds

Disclosure of “control” is critical to keep a check on the money flow  

Beneficial owners should not hide behind the maze of complex fund structure 

Sebi trying to understand the rationale for non-compliance 

Sebi asks custodians to find way out to address the secrecy clause