In relief to foreign investors worried over new KYC and beneficiary ownership norms, regulator Sebi Saturday initiated a public consultation process for finalising the new guidelines after a high-powered panel suggested changes on several contentious proposals and more time for compliance.
Amid concerns in some quarters that several foreign funds, including those managed and owned by NRIs and PIOs, may face difficulties to meet the new norms even within the extended deadline of December, the panel headed by former RBI Governor H R Khan has suggested several changes on the basis of the inputs from the finance ministry and industry representatives.
Releasing the panel's interim report for public comments till September 17, Sebi said the committee has suggested allowing NRIs, OCIs (Overseas Citizens of India) and RIs (Resident Indians) to be allowed to hold non-controlling stake in FPIs and no restriction should be imposed on them to manage non-investing FPIs or Sebi-registered offshore funds, as also in case of registered investment managers.
It has been recommended that if single and aggregate NRI/OCI/RI holding is below 25 per cent and 50 per cent, respectively, of the assets under management in the FPI, then such persons may be allowed to be constituents of the FPI.
The panel has also suggested that erstwhile PIOs (Persons of Indian Origin) should not be subjected to any restrictions, while it has recommended allowing clubbing of investment limits for well-regulated and publicly held FPIs (foreign portfolio investors) having common control.
"Clubbing of investment limit for FPIs may be on the basis of common ownership i.e. all entities having direct or indirect common shareholding/ beneficial interest, of more than 50 per cent or based on common control," the report said.
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However, clubbing may not be applicable if FPIs are appropriately regulated public retail funds, which would include mutual funds, insurance companies and pension funds.
It has also favoured doing away with additional KYC documentation requirements for beneficial owners (BOs) in case of government-related (Category 1) FPIs.
"KYC Review of Category 1 FPIs should be done at the time of continuance of their FPI registration," the report said.
"For the purpose of KYC requirements, an entity would be considered to be a 'foreign government agency' only if more than 75 per cent ownership entitlement and control is held by the government of a foreign country (including FPIs from high-risk jurisdictions)," it added.
Changes have also been suggested regarding identification of senior managing official of FPIs and for beneficial owners of listed entities, as also regarding disclosure of personal information.
According to the report, senior managing official will mean "an individual as designated by the FPI who holds a senior management position and makes key decisions relating to the FPI".
With regard to BO declaration for partnership firms, the report said that in case the view is taken that partnership company set up as general partner or limited partnership is required to identify BO on control basis then appropriate changes may be made in KYC requirements.
However, all new rules will apply equally to those investors using the Offshore Derivative Instruments (popularly known as P-Notes).
Besides, the panel has suggested giving six months to FPIs for compliance to new rules, after they are finalised, while the non-compliant investors can be given further 180 days to wind down their existing positions.
Sebi said the panel is also examining separately whether any recommendation to merge the FPI and NRI/OCI routes of investment can be made to the government and the Reserve Bank.
The panel has also recommended that Sebi may clarify suitable actions that FPIs need to take for divestment or re-classification of holdings as per the FDI limits, after consulting with the RBI.
It has also suggested to Sebi to consult the government to evolve a more objective criteria for defining high-risk jurisdictions.
Sebi had issued a circular in April, proposing the new norms on KYC and beneficial owner identification, the deadline for which was extended later by two months till December. The proposed move was aimed at checking any possible re-routing of funds of Indians and NRIs through overseas locations such as Mauritius, Singapore and Dubai.
However, several FPIs had expressed concerns over the proposed changes in rules and a lobby group named AMRI (Asset Management Roundtable of India) recently said the immediate impact of the new norms, if not amended, would be that USD 75-billion investment managed by OCIs, PIOs and NRIs will be disqualified from investing into India, and the funds will have to be withdrawn and liquidated within a short time-frame.
The organisation also warned that it will have severe impact on stocks and rupee.
Sebi, however, had said it is "preposterous and highly irresponsible" to claim that USD 75 billion will move out of India because of the move.
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