Sebi issues stricter KYC, disclosure regime for P-Notes

Markets regulator Sebi today put in place a stricter KYC and disclosure regime for Participatory Notes to make it tougher to use these offshore instruments without disclosing the money-trail and details of their users.
The new norms follows approval from the regulator's board to amend its regulations for Offshore Derivative Instruments (ODIs)-- popularly known as P-Notes -- after taking into account suggestions from the Special Investigation Team (SIT) on Black Money to ensure this route is not used for money laundering.
Taking forward the proposals approved by its board, Sebi today issued a detailed circular about the tightened KYC and disclosure requirements for ODIs, which provide the foreign investors an easier and cost-effective route to invest in Indian markets without directly registering as Foreign Portfolio Investors (FPIs).

Under the new norms, all the users of ODIs would have to follow Indian KYC and AML (Anti Money Laundering) Regulations, irrespective of their jurisdictions, while the ODI issuers will be required to file suspicious transaction reports, if any, with the Indian Financial Intelligence Unit, in relation to the ODIs issued by them.
Presently, the details of ODI holders need to be mandatorily reported to Sebi on a monthly basis. Sebi has now decided that in the monthly reports on ODIs all the intermediate transfers during the month would also be required to be reported.
Besides, ODI issuers will have to carry out reconfirmation of the ODI positions on a semi-annual basis. In case of any divergence from reported monthly data, the same should be informed to Sebi in a prescribed format.

The new guidelines have been finalised after detailed consultation with the FPIs and users of ODIs, while they were also consulted for preparation of the formats.

ODIs have often been in controversy in India for alleged misuse for round-tripping of funds. But the norms have been made stringent in the recent years, following which they have also become less attractive. While ODIs used to account for as high as 55 per cent of the total foreign fund flows in Indian capital markets in 2007, now their share has fallen to a record low level of 9.3 per cent.
"ODI issuers shall be required to put in place necessary systems and carry out a periodical review and evaluation of its controls, systems and procedures with respect to ODIs.

In order to bring about an uniformity in KYC/AML norms, it
has been decided that Indian norms will now be applicable to all ODI issuers. These norms will be the same as that applicable for all other domestic investors.
Also, ODI Issuers will be required to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the applicable threshold -- 25 per cent in case of a company and 15 per cent in case of partnership firms, trusts or unincorporated bodies.
In such cases, the ODI issuers will need to identify and verify the persons who control operations of these entities.

On KYC review, Sebi said it needs to be done on the basis of the risk criteria -- at the time of on-boarding and once every three years for low-risk clients and at the time of on-boarding and every year for all other clients.
In case of existing ODI subscriber, the KYC review should be done within three years for low risk clients and one year for all other clients from the effective date of this circular.
As part of an analysis conducted by Sebi, Cayman Islands (over 41 per cent) and Mauritius (11.09 per cent) are among the biggest locations for end-beneficial owners of ODIs. Other major locations include the UK and the US with over 10 per cent share each.

As of March 31, as many as 37 foreign portfolio investors (FPIs) reported outstanding ODIs, out of which the top 10 accounted for 73 per cent share. The biggest FPIs in this regard included arms of Morgan Stanley, Copthall Mauritius Investments, Goldman Sachs, Credit Suisse, HSBC, Merrill Lynch, Citigroup, Swiss Financial Corp and JPMorgan.