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The Securities and Exchange Board of India (Sebi) has tightened its know-your-client (KYC) and disclosure rules on issue of participatory notes (P-notes), to curb misuse of the investment route used by foreign investors not registered in India. these take effect from from July 1.
The move was approved by its board of directors on May 19, on regulation of what are formally termed Offshore Derivative Instruments (ODI). This was after considering the suggestions of the Supreme Court-appointed Special Investigation Team on undisclosed money, to ensure this route is not used for money laundering. P-notes allow foreign investors to take exposure to Indian stocks without registering with Sebi. These are issued by foreign portfolio investors registered with Sebi.
Under the new guidelines, Indian KYC or anti-money laundering rules (AML) will also apply to P-note holders. Earlier, a holder had to adhere to the KYC or AML norms of only their home jurisdiction.
“On the KYC of ODI subscribers, issuers will now be required to identify and verify the beneficial owners in the subscriber entities who hold in excess of the threshold as per anti-money laundering rules, which is 25 per cent in the case of a company and 15 per cent in the case of partnership firms or trusts or unincorporated bodies,” said Sebi. “ODI issuers will be also required to identify the person who controls the operations when no beneficial owner is identified, based on the aforesaid materiality threshold.”
The capital markets regulator has also asked ODI issuers to do the KYC review on the basis of the risk criteria, once every three years for low-risk clients and one year for all others.
| SEBI’S GUIDELINES ON P-NOTES AND THEIR IMPACT |
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Indian know-your-customer and anti-money laundering norms to be applicable Impact: KYC/AML norms will be same for P-note holders and onshore investors No transfer of P-notes without prior permission Impact: Might impact liquidity, attractiveness Risk-based KYC Impact: Increase in frequency of reporting Identify and verify beneficial owners Impact: More information on beneficial owners Reconfirmation of offshore derivative instrument positions Impact: Increase in frequency of reporting |
Suspicious transaction report
Impact: Strengthen surveillance
Periodic operational evaluation
Impact: Increase control, systems and procedures with respect to ODI
Sebi has also issued curbs on transferability of P-notes between two foreign investors. And, raised the frequency of reporting by note issuers. Presently, the details of ODI holders need to be mandatorily reported to Sebi on a monthly basis. Sebi has now decided that in these monthly reports, all intermediate transfers during the month would also have to be reported.
These apart, P-note issuers will have to do a reconfirmation of the ODI positions semi-annually. If any divergence from the reported monthly data, Sebi is to be told, in a prescribed format.
“A certificate in this regard should be submitted on an annual basis to Sebi by the chief executive officer or equivalent of the ODI issuer. The said certificate should be filed within one month from the close of every calendar year,” Sebi has said.
