Sebi tightens Know Your Customer norms for foreign portfolio investors

The Securities and Exchange Board of India (Sebi) has tightened some Know Your Customer (KYC) rules for foreign investors.

A circular it issued on Tuesday sets stiffer rules for foreign portfolio investors (FPIs) from ‘high risk’ jurisdictions and also from People of Indian Origin (PIOs) who control an FPI. These measures have been taken to align Sebi’s rules around the Prevention of Money Laundering Act.

According to the new rules, in an FPI structured as a company, a person owning 25 per cent stake would be considered the beneficial owner (BO). If structured as trust or partnership entity, the threshold is 15 per cent. If the fund originates from a high-risk jurisdiction, any person owning 10 per cent stake or more in an FPI would be considered a BO. Also, all investors from such jurisdictions would have to comply with the KYC requirement for category-III  FPIs.

Further: “If a BO exercises controls through means like voting rights, agreements, arrangement...that should also be specified. It is clarified that the BO should not be a nominee of another person.”

Sebi had exempted category-I and -II FPIs, known to be low-risk investors, from having to give specified KYC documents. It has now asked these FPIs to comply with this paperwork if any investigative agency seeks the information.

The market regulator has also reclarified on a PIO owning stake in an FPI. According to the new rules, an Indian here or a non-resident Indian cannot be the beneficial owner of an FPI. But, if an FPI is a non-investing entity, an Indian may continue to remain a BO.

Funds which do not comply with the new norms will not be able to take any new derivative positions after April. Such funds get six months to terminate these positions.