Custodians flag concerns to Sebi on monitoring foreign holdings in DRs

Confidentiality, difficulty in differentiating an account as client or non-client are some of the issues raised

A clutch of custodians have written to the Securities and Exchange Board of India (Sebi) highlighting the difficulties associated with complying with the diktat on monitoring foreign holding in depository receipts.

The circular requires designated depository participants or custodians to collect, monitor and report information every month on offshore derivatives instruments (ODIs) and depository receipts (DRs) held by foreign portfolio investors (FPIs) and those foreign entities which belong to the investor group of the FPIs. The report is required to be submitted to the depository on the 17th of every month.

Currently, ODIs are reported to Sebi directly by ODI issuers, while FPI holdings are reported to the depositories through custodians. Custodians only report onshore India investments for entities registered as FPIs.

Custodians have pointed out that the depository accounts are opened in the name of registered FPIs and securities are safe kept in that account. For such FPIs, custodians do not maintain the record of the underlying Indian security represented by the ODI or DR. Also, the custodians do not maintain accounts for the FPI group entities who maintain accounts with other custodians or hold only ODIs or DRs offshore.

To implement the circular, the custodian is required to open and maintain accounts of investor group entities or FPIs who maintain accounts with another custodian, and to record the positions of the underlying Indian security represented by the ODIs and/or their DR positions. The custodian will be required to perform the necessary due diligence as required under the KYC/ PMLA norms prior to opening the account of such non-client entities. Currently, however, there is no mechanism to differentiate an account as being the client or non-client of the bank.

Custodians have also highlighted confidentiality concerns in disclosing information to custodians through nodal FPIs, especially when there is no account based relationship between the other FPIs or foreign entities part of the investor group and the custodian. To get around this problem, custodians want the depository to develop a centralised web portal to facilitate the nodal FPI or FPI to report the underlying Indian security represented by the ODI or DR directly to the depository.

The custodians have said it will not be possible to differentiate between the actual overseas instrument representing the ODI or DR while recording the position of the underlying Indian security representing the ODI or DR. This is because one underlying Indian security with the same International Securities Identification Number can be held by a foreign entity as an ODI subscriber as well as DR holder.

"Such positions recorded cannot be validated or reconciled with any other base data and, as such, the onus of the authenticity of this reporting will be of the reporting or nodal FPI only," the letter said.

Short on capabilities

• Custodians highlight issues in monitoring foreign holding in depository receipts
• Diktat requires custodians to collect and report information on ODIs, DRs held by FPIs
• Currently, ODIs are reported to Sebi directly by ODI issuers
• Custodians only report onshore India investments for entities registered as FPIs
• Custodians do not maintain accounts for FPI group entities who maintain accounts with other custodians or hold only ODIs or DRs offshore
• Confidentiality concerns in disclosing information to custodians through nodal FPIs, especially in the absence of an account-based relationship
• Custodians say depository should develop a centralised portal where nodal FPI/FPI can report Indian security represented by the ODI or DR directly