Sebi taps custodians for beneficial ownership data from neighbour nations

As per Sebi norms, threshold for identification of beneficial owners of FPIs on controlling ownership interest is 25% in the case of companies, 15% for partnership firms

The Securities and Exchange Board of India (Sebi) has reached out to custodians to provide information on beneficial owners from neighbouring countries, including China.

In April, the regulator had reached out to custodians asking for beneficial ownership information of investors coming from China, Hong Kong, and 11 other countries. In May, it had asked them to separately identify foreign portfolio investors who have beneficial owners from mainland China, Hong Kong and Taiwan.

Market players said Sebi wants to keep itself updated on the data on ‘beneficial ownership’ to ensure there isn’t any disproportionate investment coming from neighbouring countries.

“It is possible that the information on beneficial owners would have changed from what we had provided earlier, which is why the regulator has reached out to us again. Accordingly, we have provided the updated data,” said a custodian, adding that as of now the regulator had not specified any timeframe within which this data has to be provided.

Earlier, the regulator had defined beneficial ownership to include not only economic ownership but also control. Such entities had to be identified on the basis of ownership, control, and senior managing official (SMO).

According to the current Sebi guidelines, the threshold for identification of beneficial owners of foreign portfolio investors (FPIs) on controlling ownership interest is 25 per cent in case of companies and 15 per cent in case of partnership firms. For high-risk jurisdictions, the threshold is lower at 10 per cent.

Control is the right to appoint the majority of directors or influence the decision-making of the entity. SMO is an individual designated by an FPI, who holds a senior management position and makes key decisions relating to the FPI.

China has been defined to include Hong Kong and Taiwan, even though they do not share a land border with India. Over the years, several Chinese funds that manage $1 billion or more have set up operations in Hong Kong, which serves as a launch pad for mainland managers seeking access to overseas markets. The majority of investments in many such funds are from Chinese investors, making them the ultimate beneficial owners, said experts.

“Any move to restrict FPI investments just because the investment manager is in Hong Kong could have wider implications as a lot of global funds that currently invest into India have managers that sit in Hong Kong,” said a person who deals with FPIs. 

Taiwan, while not an investment hub, has 122 registered FPIs investing in India. The political and legal status of Taiwan is a contentious issue, with China seeing Taiwan as a breakaway province that will eventually be part of the country again.

According to current norms, holding by an FPI or an investor group should not exceed 10 per cent of the paid-up capital of the listed entity. It is not yet clear if Sebi will lower this ceiling for funds that have Chinese beneficial owners.

Experts believe that instead of focusing on Chinese FPI flows, the Indian government should redouble its efforts to woo investments through countries such as Mauritius and Singapore (after proper verification of ultimate beneficial owners) as well as the US, the UK, Japan, France, and Germany, which have over the years been the big sources of inflow.