Sebi's omnibus structures move boon for domestic brokerages

The Securities and Exchange Board of India’s (Sebi’s) decision to allow omnibus structures at Gujarat International Finance Tec-city (Gift City), an international financial  services centre (IFSC), has come as a boost for domestic brokerages.

According to the rules, any eligible foreign investor (EFI) or a broker (member) registered at IFSC can now offer omnibus structures to their clients.  This allows Indian brokerages, who are registered as members at the Gift City, to offer 'omnibus account facility’ to foreign investors, which will allow them to participate in markets without having to register themselves with the regulators. 

Such investment structures are popular under foreign jurisdictions such as Singapore and Dubai. Industry players consider the move a game-changer as it will prompt foreign clients to get exposure to the Indian markets. 

In such structures, a broker carries out trading activities for multiple clients through his own member account. This gives investors flexibility in compliance and regulatory requirements.

Until now, domestic brokerages have not made breakthrough when it comes to dealing with overseas clients as the space is dominated by foreign portfolio investors (FPIs) such as Citibank, Morgan Stanley and BNP Paribas. Many believe domestic brokerages will now have a big role to play when it comes to managing foreign money.

"Several domestic brokerages are now planning to offer the service to their offshore clients. The fees earned by brokers will be higher for omnibus accounts, since the broker takes care of all the regulatory and compliance requirements. We may see several small and mid-sized foreign funds using this route," said a custodian.

All big-ticket Indian brokerages such as Edelweiss, Motilal Oswal Financial Services and IIFL cater to foreign investors through their overseas subsidiaries. They essentially target smaller FPIs such as charity trusts and high-net worth individuals overseas to offer their products. Majority of their clients are registered as category-III FPIs in the Indian markets.

These brokerages offer the so-called multi-class vehicles (MCVs) to their clients. In MCVs, a broker offers segregated accounts to his clients. It used to be a popular route of investing for foreign institutions under the erstwhile foreign institutional investors (FIIs) regime until Sebi cracked the whip on such structures pinched by concerns of money laundering. 

Earlier, an account could be added in the MCV by a broker and no permission was required from the Sebi. 

However, under the new rules, whenever a brokerage adds an account to MCV, it needs to get an approval from the Sebi and also has to comply with the anti-money laundering rules.

No just MCV, in the recent past Indian market regulator had tightened indirect participation routes available to Indian or foreign investors. The regulator also tightened the p-note rules by imposing additional compliance requirements such as asking the p-note issuer to keep the end-beneficiary information of its clients.

There are specific safeguards even in the omnibus accounts offered from IFSC Gift. Although a client who comes on board through omnibus account need not register with the Sebi, the broker who is handling the account will still be required to carry out know your customer(KYC) documentation of the client.