Stringent eligibility criteria laid out for DDPs

Sebi lays out norms for designated depository participants, the link between regulator and foreign investors

The Securities and Exchange Board of India (Sebi) has laid out a stringent eligibility criteria for a designated depository participant (DDP), the link between foreign investors and the regulator.

According to the K M Chandrasekhar committee's suggestions on foreign portfolio investment (FPI), DDPs will have to be the custodian and depository participant registered with Sebi, an authorised dealer (category-1 bank), have multi-national presence and should demonstrate it has systems and procedures to comply with the FATF (Financial Action Task Force) standards, Prevention of Money Laundering Act, and Sebi rules.

The committee's recommendations have been fully accepted by Sebi at its board meeting, which was held on June 25. Sebi made the recommendations public on Thursday.

One key recommendation is that foreign investors will not have to register with the Sebi directly but with DDPs. Also, entities registered with Sebi as a foreign institutional investor (FII), sub-account, and qualified foreign investors (QFIs) will be merged into one entity to be called FPI. Strict obligations on these market intermediaries are also proposed.

DDPs will have to ensure entities having opaque structures, where the details of ultimate end-beneficiary is not known, are not allowed.

A DDP will also have to ensure equity shares held by FPIs are free from all encumbrances, including pledge or lien at all times. They will also be required to file the necessary information for the purpose of obtaining a Permanent Account Number (PAN) and ensure that all the investor-related documents are available.

The committee has also suggested 'grand-fathering arrangement' under which existing qualified depository participants (QDPs) not meeting the DDP eligibility criteria will be given one year to meet the requirements. If a QDP fails to comply, it will have to surrender its authorisations.

At present, of the 59 QDPs approved by Sebi, only six have QFI investments and of these six, only three are custodians.

To implement a risk-based know your customer (KYC) system, Sebi has accepted the proposal to decided to divide foreign investors into three categorises.

Category-I will comprise systemically important institutions such as sovereign wealth funds, foreign central banks, while Category-II will include asset management companies, pension funds and insurance companies. Category-III will include investors, not covered in the first two categories, primarily individuals and trusts.

The committee has said that the broad-based funds managed by investment manag ers will be categorised in the same category of its investment manager, subject to the condition that investment managers take full responsibility for their actions.

Some of these funds not regulated in their home jurisdiction would have otherwise come under category-III, which would have prevented them from taking positions through participatory notes.