Securities and Exchange Board of India (SEBI) on Saturday initiated a public consultation process for formulating new guidelines over new KYC and beneficiary ownership norms.
This process was initiated after a high-powered panel suggested changes on several questionable proposals and more time for compliance. This is a sign of relief for the foreign investors who were worried about these new norms.
One of the primary concerns is that even with the extended deadline of December several foreign funds, including those managed and owned by NRIs and PIOs, may face difficulties to meet the new norms. A panel headed by Deputy Governor HR Khan who is also the former RBI Deputy has suggested several changes on the basis of the inputs from the finance ministry and other industry representatives.
The panel’s interim report has been released for public comments till September 17. SEBI said that the committee has suggested that NRIs, OCIs (Overseas Citizens of India) and RIs (Resident Indians) shall be allowed to hold a non-controlling stake in FPIs. No restriction must be imposed on them to manage non-investing FPIs or SEBI -registered offshore funds.
It has been suggested that if the single and aggregate of the assets under management in the FPI NRI/OCI/RI holding is below 25 per cent and 50 per cent, respectively, then such persons may be allowed to be constituents of the FPI.
The panel has also suggested that previous PIOs (Persons of Indian Origin) should not be subjected to any restrictions. It has further suggested 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 the bodies having direct or indirect common shareholding/ beneficial interest, of more than 50 per cent or based on common control," the report said.
If FPIs are appropriately regulated public retail funds they will not be subject to clubbing. These include mutual funds, insurance companies and pension funds.
In the case of government-related (Category 1) FPIs, it has also recommended doing away with additional KYC documentation requirements for beneficial owners (BOs).
"KYC Review of Category 1 FPIs should be done at the time of the 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 classification of a senior managing official of FPIs and for the disclosure of personal information of beneficial owners of listed entities.
What we mean by a senior managing official is "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 it is required to identify BO on control basis, in case the view is taken that partnership company set up is a general partner or limited partnership. Then suitable changes may be made in KYC requirements.
However, all new rules will apply in the same way to those investors using the Offshore Derivative Instruments (popularly known as P-Notes).
A period of six months has been given for the compliance to new rules by the panel after they are finalized, While an additional 180 days will be provided to the non-compliant investors for winding down their existing positions.
SEBI is also exploring 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 appropriate actions that need to be taken by FPIs for divestment or re-classification of holdings as per the FDI limits. These actions must be formulated in consultation with the RBI.
The panel has also suggested to SEBI to confer with the government to develop more objective criteria for defining high-risk jurisdictions.
However, several FPIs had expressed apprehensions over the proposed changes in rules. A lobby group named AMRI (Asset Management Roundtable of India) recently said the country may face huge investment losses if the norms are not amended. It added that an approx USD 75-billion will be disqualified from investing in India by OCIs, PIOs and NRIs if the norms are not revised. The funds will have to be withdrawn and settled within a short time-frame.
However, SEBI denied such claims and said it is "preposterous and highly irresponsible" to claim that USD 75 billion will move out of India because of the move.
The organization also warned that it will have a severe impact on stocks and rupee.