12 April 2018 SEBI Clarification on Know Your Client Requirements for Foreign Portfolio Investors Recently, the SEBI has issued a clarification outlining the key features of the Circular modifying the Know Your Client Requirements (KYC) for Foreign Portfolio Investors(FPIs) are as follows: 1. Identification and verification of Beneficial Owners (BO) As per the existing provisions, following KYC norms were applicable based on the FPI category: For Category I Exempt For Category II Required - Can declare "no Ultimate Beneficial Owner over 25 percent" For Category III Required As per the Circular dated 10 April 2018, BO is the natural person(s) who ultimately owns or controls a FPI. The BO should be identified in accordance with Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (PMLA Rules). In this matter, the criteria for identification of BO is stated as hereunder: Types Revised provisions for Identification and verification Criteria of BO FPIs having structure of: Company Controlling ownership interest basis 25 per cent Partnership firm, Trust and unincorporated association of individuals Ownership or entitlement basis -15 per cent FPIs coming from high risk jurisdictions (Refer Note 1) Intermediaries may apply lower materiality threshold of 10 percent; Ensure KYC documentation as applicable for category III FPIs; Comply with the requirements contained in the Master circular dated 31 December 2010 (Refer Note 2);
Applicability of materiality threshold To identify the BO, the materiality threshold should be first applied at the level of FPI. Next look through principle shall be applied to identify the BO of the material shareholder/ owner entity. Only BO with holdings equal and above the materiality thresholds in the FPI need to be identified through the aforesaid look through principle. Where no material shareholder/owner entity is identified in the FPI using the materiality threshold for controlling ownership interest basis; and also on control basis (for companies and trusts BO shall be the senior managing official of the FPI. In case of companies/ trusts represented by service providers like lawyers/ accountants Information to be provided of the real owners/ effective controllers of those companies / trusts. If the BO exercises controls through means like voting rights, agreements, arrangement etc. BO should not be a nominee of another person Further, the BO should not be the following: a person mentioned in United Nations Security Council s Sanctions List notified from time to time; be from jurisdiction which is identified in the public statement of Financial Action Task Force (FATF) (as detailed in the Circular). 2. Format for reporting of BOs Category II & III FPIs are required to maintain a list of BOs. In order to bring consistency, it has been decided that Category II & III FPIs should provide list of their BOs in the format as specified at page 3 of the Circular; This list should be certified by FPI. FPI should also certify that there are no other BOs other than those referred in list; The list of BOs should be provided (in aforementioned format) within six months from the date of this circular. 3. Indians as BO of FPIs It has been further clarified by that Non Resident Indian ( NRI )/Overseas Citizen of India(OCI) cannot be BO of FPIs. However, if an FPI is Category II Investment manager of other FPIs and is non-investing entity, it may be promoted by NRIs/OCIs. It is also clarified that Resident Indian cannot be a BO of FPI. Existing FPI structures which are not in conformity with the above requirements, shall not create fresh position at the end of expiry of derivative contract of April 2018. 4. Bearer share structure FPIs or the investors which are identified as BO s on basis of threshold limits in accordance with PMLA Rules in the FPIs shall ensure that they have not issued bearer shares;
If the legal constitution of FPIs or their investors identified and/or applicable home jurisdiction regulations permit issue of bearer shares, then the FPIs should certify that they have not issued nor have maintained any outstanding bearer shares and also certify that they will not issue the same. 5. KYC review Existing provisions Eligible foreign investors shall be subject to KYC review as and when there is any change in material information / disclosure. Revised Provisions Comprehensive KYC review of FPIs (including change in BOs / their holdings) to be done on a periodical basis based on risk categorization of FPIs; In case of high risk clients (including those coming from high risk jurisdictions), it should be done on yearly basis; In case of all other clients, it should be conducted every three years preferably at the time of continuance of FPI registration. 6. KYC documentation for Category III FPI For Category III FPIs, clarifications are given for providing KYC documentation. Category III FPI shall now have to provide: i) Audited Annual financial statement or a certificate from auditor certifying their net worth; and ii) In case of new funds/ companies/ family offices, the audited financial statement of promoter person may be obtained. Further, the requirement of providing Constitutional document for all category of FPIs remains unchanged. 7. Exempted documents to be provided during investigations/ enquiry Existing provisions FPIs were exempted from furnishing certain supporting KYC documents depending on risk involved. Category III FPIs were exempted from submission of proof of address of specified persons. Revised provisions In respect of exempted documents, concerned FPIs should submit an undertaking to Designated Depository Participant/ Custodians that upon demand by Regulators/ Law Enforcement Agencies, the relevant documents would be provided. Since Category III FPIs are high risk investors, declaration on letter head is to be provided by them. Notes:
1) High Risk Countries are those where existence / effectiveness of money laundering controls is suspect, where there is unusual banking secrecy, countries active in narcotics production, countries where corruption (as per Transparency International Corruption Perception Index) is highly prevalent, countries against which government sanctions are applied, countries reputed to be any of the following havens/ sponsors of international terrorism, offshore financial centers, tax havens, countries where fraud is highly prevalent. 2) The overriding principle to be followed is that intermediaries shall be able to satisfy themselves that the measures taken by them are adequate, appropriate and abide by the spirit of such measures and the requirements as enshrined in the PMLA. Each intermediary shall consider carefully the specific nature of its business, organizational structure, type of client and transaction, etc. to satisfy itself that the measures taken by it are adequate and appropriate. 3) The existing FPIs should comply with the above requirements within six months from the date of this circular 4) Clubbing of investment limit for FPIs [of 10 per cent as per the SEBI (FPI) Regulations, 2014] shall be done considering the above provisions / clarifications 5) All existing FPIs whose clubbed investment in equity shares of a company is in breach of the provisions in view of this circular are given time of six months from the date of this circular to ensure compliance 6) In respect of any future breach of clubbing limit, there shall be two options:- (a) The said investments shall be treated as Foreign Direct Investment from the date of breach; or, (b) FPI in breach shall have to divest its holding within five trading days from the date of settlement of the trades to bring its shareholding below 10 percent of the paid up capital of the company.
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