The issue of identifying opaque investment vehicles and preventing these from investing in Indian markets has become contentious in the implementation of the proposed qualified foreign investor (QFI) regime. Foreign entities use structures, such as multi-class vehicles and protected cell companies to invest in the Indian markets. In some cases, these structures have been found to conceal the identity of the end-beneficiary.
In a circular dated January 13, the Securities and Exchange Board of India (Sebi) said, “The depository participant (DP) shall ensure only those entities are allowed to open demat account as QFI whose ultimate/end beneficial ownership is not resident in India. The DP shall carry out necessary due diligence for the same at the time of account opening. An express undertaking to this effect shall be obtained by the DP from the QFI.”
Under para 7.5 of the circular, Sebi said, “The entities having opaque structure(s) such that details of the ultimate/end beneficiary are not accessible or where the beneficial owners are ring-fenced from each other or where the beneficial owners are ring-fenced with regard to enforcement shall not be allowed to open demat account as QFI. The DP shall perform appropriate due diligence at the time of account opening and ensure such entities are not allowed to open demat account.”
| QUALITY QUANTIFIED Eligibility criteria for QDPs |
| * Should have net worth of Rs 50 crore or more |
| * Should have arrangements to receive and remit money |
| * Should be a clearing bank or clearing member of clearing corporation |
| * Should have systems to comply with the FATF Standards, Prevention of Money Laundering (PML) Act and Sebi rules |
| * Should obtain prior approval of Sebi |
Thus, Sebi has put the onus on qualified DPs (QDPs) to ensure the Know Your Customer (KYC) requirements are properly undertaken and the end-beneficiary ascertained. But intermediaries say they are not equipped to check these facts and have to rely on client’s words. The finance ministry is expected to soon take a final call on this matter. It has invited suggestions from market participants to iron out the issues in the QFI regime and make it attractive for foreign investors.
“Identifying opaque structures may not be possible without self-disclosure by clients. Detailed guidelines in this regard are required,” said an official with a QDP.
Sebi has not clearly laid down the sort of checks QDPs need to undertake to ensure compliance and the kind of assurances that need to be given by the investor, according to the custodians. But some experts feel custodians may soon have to equip themselves with these capabilities.
“They have put the minimum net worth for QDPs at Rs 50 crore. This means if they do not have any capability, they should be able to build it. That is the only safeguard Sebi has put in place,” said M S Sahoo, advocate and former Sebi board member.
Sebi had initially said DPs with a paid-up capital of Rs 50 crore could handle the QFI business. Later, on January 25, it revised the figure to Rs 50 crore. According to Sahoo, it’ll be a long learning process for both Sebi and the participants. “It’ll take up to six months for Sebi to gauge what DPs can do and how much one can rely on undertakings given by QFIs,” he said.
