KYC and Beneficial Ownership Disclosures by FPIs

Based on the interim recommendations of the Working Group constituted by the Securities and Exchange Board of India (“SEBI”) under the chairmanship of Shri H R Khan with respect to Know Your Client (“KYC”) requirements for Foreign Portfolio Investors (“FPIs”), SEBI had under their circular dated September 21, 2018 clarified that beneficial ownership criteria will only be relevant for the purposes of KYC of the FPI and not for determining eligibility of the FPIs, and had inter alia provided directions for identification and verification of Beneficial Owners (“BO”) for Category II and Category III FPIs.

As per the said circular, BOs are natural persons who ultimately own or control an FPI and should be identified in accordance with Rule 9 of the Prevention of Money- laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”). The BO of an FPI is required to be identified by way of controlling ownership interest and by way of control. The materiality threshold to be applied for identifying the BO by way of controlling ownership interest would be as provided in Rule 9 of PMLA Rules. The Circular also provides that in respect of FPIs coming from “high risk jurisdictions”, a lower materiality threshold of 10% should be applied for identification of BO and the KYC documentation to be obtained should be as applicable for Category III FPIs. Details of all individuals/ entities above the FPI, holding directly or indirectly more than the materiality threshold in the FPI are required to be disclosed in the BO disclosures. While SEBI has not specified a list of high-risk jurisdictions, the concerned Designated Depository Participant (“DDP”) is required to identify whether the FPI is from a high-risk jurisdiction or not. Interestingly, DDPs have been taking differing views in this regard for certain jurisdictions. Also some custodians have based the 10% threshold solely on the basis of whether the FPI is from a high risk jurisdiction, other custodian banks are applying a lower materiality threshold if the FPI is registered as a Category III FPI whether or not coming from a high risk jurisdiction. In addition to the identification of the BO of the FPI on a controlling ownership interest basis, the FPI is also required to identify the BO on a control basis. The term ‘control’ includes the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

The materiality threshold to identify the BO is required to be first applied at the level of FPI and next on a look through basis to identify the BO of the intermediate shareholders or owner entity. In the look through basis, the BO and intermediate shareholders or owner entity with holdings equal & above the materiality thresholds in the FPI need to be identified. For intermediate shareholders, or owner entities, the name of such entities and percentage holding is also required to be disclosed in a specified format. In the event the FPI does not identify a natural person as the BO by way of controlling ownership interest or by way of control, then the FPI must identify a senior managing official (“SMO”) as its BO. Further, the exemption provided in Rule 9(3)(f) of PMLA Rules for listed companies is not made available to foreign companies. SEBI has also clarified that, in case of companies or trusts are represented by service providers like lawyers/ accountants, then such FPIs should provide information of the real owners/ effective controllers of the FPI. SEBI has also clarified that these BO disclosure requirements will also have to be followed for Offshore Derivative Instruments.

The Circular further stipulates a periodic KYC review as and when there is any change in material information/disclosure. All FPIs with a Category II or Category III registration from high-risk jurisdiction will be subject to KYC review on a yearly basis. The Circular also reassures that the KYC Registration Agencies (“KRA”) will lock the details provided by the FPI on the BO, including details of the SMO. Such information will only be accessible to intermediaries after authentication and only on a ‘need to know basis’ after the KRA receives confirmation from the FPI, or its Global custodian in this regard.

The Circular is a welcome change from the earlier KYC requirements prescribed by SEBI on April 10, 2018.

Authors:

Rushabh Maniar, Partner
Sonali Ladha, Associate

Date: May 21, 2019