Enhanced Framework for Beneficial Ownership (BO) Disclosures by Foreign Portfolio Investors (FPIs) in India

India’s Foreign Portfolio Investor (FPI) framework provides a critical channel for foreign investment in Indian securities, governed by the Securities and Exchange Board of India (SEBI). To align with India’s Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) mandates, the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (PMLR), necessitates FPIs to identify and verify Beneficial Owners (BOs) as part of the Know Your Customer (KYC) process.

PMLR Requirements for Identifying Beneficial Owners

1. Quantitative Parameters:
BOs are determined based on specific ownership or economic interest thresholds:

• 10% or more ownership in the case of companies.
• 15% or more in the case of trusts and partnerships.

2. Control-Based Assessment:
BOs are also identified based on control criteria, such as the authority to appoint a majority of directors or exercise significant influence over management or policy decisions.

3. Senior Managing Official (SMO):
If no natural person is identified through ownership or control criteria, FPIs must designate a senior managing official (SMO) as the BO.

SEBI's Observations and Challenges

To prevent misuse of the FPI route, SEBI introduced significant reforms. These stemmed from observations detailed in its May 31, 2023, Consultation Paper. Key concerns include:

1. Concentration in Investments: Substantial and static investments by FPIs in a single Indian company over extended periods.
2. Layered Ownership Structures: Instances of economic interest held by the same individual through multiple entities below the BO threshold, evading detection.
3. Gaps in Identifying BOs: Designation of SMOs as BOs in cases where natural persons are not identifiable.
4. Regulatory Evasion: Investments circumventing Press Note 3 (PN3) restrictions, particularly from countries sharing land borders with India.

SEBI’s Revised Disclosure Framework

To address these issues, SEBI mandated additional BO disclosures through its August 24, 2023, circular. FPIs meeting specific criteria are now required to provide granular disclosures, detailing ownership, economic interests, and control on a complete “look-through” basis, down to natural persons, regardless of thresholds.

Applicability:
The additional disclosure obligations apply to FPIs that:

1. Concentration in a Corporate Group: Hold more than 50% of their Indian equity Assets Under Management (AUM) in a single corporate group.
2. Significant Investment in Indian Markets: Individually or as part of an investor group, hold over ?25,000 crore (USD 15 billion) of equity AUM in Indian markets.

Exemptions from Disclosure

SEBI has provided specific exemptions under the revised framework to:

• Government and Government-Related FPIs: Such as sovereign funds.
• Public Retail Funds: Validated by Designated Depository Participants.
• Exchange-Traded Funds (ETFs): With less than 50% exposure to Indian equity securities.
• Entities from Recognized Jurisdictions: Registered on exchanges like NASDAQ, NYSE, or LSE.
• FPIs with Wide Investor Bases: Involving pooled structures.

March 2024 Circular: Further Refinements

In response to industry feedback, SEBI issued additional exemptions on March 15, 2024. FPIs meeting the 50% AUM concentration criteria in a corporate group are exempted if they fulfill the following conditions:

1. No Identified Promoter: The apex company of the group lacks a promoter.
2. Limited Exposure Beyond Apex Entity: The FPI’s AUM concentration in the corporate group, excluding the apex entity, is below 50%.
3. Collective Holdings Below 3%: Combined holdings of all FPIs meeting the exemption criteria do not exceed 3% of the apex entity’s total equity share capital.

Consequences of Non-Compliance

Failure to adhere to the enhanced BO disclosure requirements carries strict penalties, including:

• Invalidation of Registration: Loss of FPI registration.
• Prohibition on Further Investments: Restriction from purchasing Indian securities.
• Forced Market Exit: Liquidation of existing holdings and withdrawal from Indian markets within 180 days.

Strategic Roadmap for FPIs

To navigate SEBI’s tightened BO disclosure norms, FPIs should adopt the following measures:

1. Robust Internal Monitoring: Implement mechanisms to track AUM concentration and identify threshold breaches in real-time.
2. Proactive Realignment: Adjust portfolios within the stipulated 10 trading days if thresholds triggering additional disclosure are breached.
3. Enhanced Transparency: Maintain detailed ownership and control records to facilitate compliance with SEBI’s granular disclosure requirements.

Conclusion

SEBI’s enhanced disclosure framework underscores its commitment to promoting transparency, mitigating regulatory risks, and safeguarding market integrity. While the stringent norms necessitate greater compliance efforts from FPIs, they contribute to a robust regulatory environment conducive to fair and equitable market practices. FPIs are encouraged to align with these requirements to ensure seamless participation in India’s burgeoning securities market.

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Article Compiled by:-

~Mayank Garg

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.