The Securities and Exchange Board of India (SEBI) by a circular dated 21st September has announced the revised guidelines for know your client (KYC) requirement for foreign portfolio investors (FPIs) wherein resident as well as non-residential Indians have been permitted to hold non-controlling stake in such entities. Previously, resident in India or a Non-Resident Indian were not eligible for FPI registration.
SEBI had constituted a working group headed by former Reserve Bank of India (RBI) deputy governor H.R. Khan to look into the various issues raised by foreign portfolio investors, including those about ‘know your client’ (KYC) requirements and disclosures about beneficial ownership. On the basis of report of the group, SEBI has introduced the revised KYC Norms for FPI. Foreign portfolio investment (FPI) refers to investing in financial assets such as stocks or bonds in a foreign country. There are 3 categories of FPI. These are:
- Category I: Government and Government-related investors.
- Category II: appropriately regulated broad based funds such as mutual funds.
- Category III: all others not eligible under Category I and II
By this circular, SEBI allows non-resident Indians (NRIs), resident Indians (RIs) and overseas citizens of India (OCIs) to be part of such FPIs investing in India if their aggregate holding in such an overseas fund is less than 50% of the corpus of the fund. Individual share of such entities would be allowed to be constituents of FPIs if the individual share of such entities cannot exceed 25% in an FPI. Some of the KYC Norms expressed in this circular are as follow-
- Identification of beneficial owner: Beneficial Owners (BOs) are the natural persons who ultimately own or control an FPI . FPIs are required to maintain a list of BOs and should provide such list of their BOs to SEBI.
- Periodic KYC Review: KYC Review means steps taken to ensure that documents, data or information collected are kept up-to-date. For Category III and Category II FPIs; KYC review should be done on yearly basis. In case of all other clients, the KYC review should be conducted at the time of continuance of FPI registration. For Category III FPI, Financial data is mandatory for KYC. Since Category III FPIs are high risk investors, during KYC, “declaration on letter head” shall be provided.
- Data security: The KYC Registration Agencies (KRAs) shall lock personal information provided with regard to beneficial owner of FPI. Such information should be made available to intermediaries only on ‘need to know basis’ using an authentication method.
- Period for maintenance of records: The Custodian should maintain the KYC records in original for a minimum period of five years. In case any litigation is pending, these records should be maintained till the completion of the proceedings.
- Timelines for compliance: Existing FPIs and new applicants would be given two years to comply with the new. In case of temporary breach, FPI shall be allowed to disinvest its holdings within a time period of 180 days.