Aadhaar-demat account linking: Sebi's diktat spooks overseas investors

Sebi directs freezing of all demat accounts not linked to Aadhaar by December 31

It is not just domestic investors but also foreign portfolio investors (FPIs) who are grappling with the Securities and Exchange Board of India’s (Sebi’s) diktat mandating linking Aadhaar with “all demat accounts”.

In August, Sebi had directed the stock exchanges to cease the accounts of all the clients who failed to submit Aadhaar details by December 31.

Prima facie, the circular appeared to be aimed at domestic investors. However, ambiguous wording has spooked FPIs, who have sought clarity from Sebi on whether the circular would be applicable to them too.

“FPIs, through their custodians, have written to Sebi, seeking clarity on the Aadhaar issue. The instructions issued by Sebi in this regard are not clear. We want the regulator to provide explicit exemptions so that there are no last-minute surprises,” said a source who has a direct knowledge of the development.

Aadhaar is a unique-identity number issued to all Indian residents based on their biometric and demographic data. While Aadhaar can’t be issued to institutions, the unique-identity numbers of the “authorised signatory” who operate the accounts need to be quoted.

Sources said Sebi was gathering market feedback on the issue and could provide the custodians more clarification. Meanwhile, Sebi is keeping a tab on the developments in the Supreme Court, where the constitutional validity of Aadhaar is being challenged, the source added.

Citibank, JP Morgan, HSBC, and BNP Paribas are the top custodians who handle FPI accounts. Some of them have written to Sebi on the matter.

“Although FPIs have not been given any specific exemptions, I think there is no need to panic as there are enough legal safeguards available. However, a clarification from Sebi in this context would be welcome because it would address the concerns of the foreign funds,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells.

The biggest fear of FPIs is that lack of clarity could leave room for adverse interpretations as previously seen in issues like the minimum alternate tax (MAT) and General Anti-Avoidance Rules (GAAR).

In the event of Sebi not providing timely clarity, overseas funds would stare at physical hurdles linking Aadhaar.

Typically, some FPIs operate their trading accounts directly while some authorise a local depository participant (DP) to manage their funds. 

In the first scenario, authorised signatories are based out of an off-shore location such as Singapore or Hong Kong. According to the Aadhaar Act, 2016, only Indian residents are authorised to get an Aadhaar number. In the case of accounts managed by DPs, FPIs are concerned about information privacy, said a source.

“Sebi should make some specific exceptions keeping in mind various practical hurdles. Unlike the western markets, where brokers hold the securities on behalf of owners, in India the shares reside with the actual owner. In the case of FPIs, Sebi has also amended several regulations and now has access to details of end beneficiaries. Hence, the amount of value add derived by linking Aadhaar with demat accounts is limited,” said Sandeep Parekh, founder, Finsec Advisors.

In recent years, Sebi has increased the know your customer (KYC) requirements for overseas investors to prevent money laundering. Experts say further tightening may not be required.

“Sebi already has access to information of all foreign portfolio investor transactions through the stock exchanges and custodians. Further, there is a strong KYC documentation in place and their demat accounts are already linked with the PAN number. I think the current system is transparent enough and asking them for Aadhaar could be an undue burden on them,” said Sudhir Bassi, partner, Khaitan & Co.