Tighter rules for foreign investors

Regulators decree opaque structures and multi-class vehicles will not be permitted to enter stock market.

The country’s banking and market regulators today issued guidelines for direct entry of foreign individuals and institutions to Indian stock market.

The move follows the finance ministry’s decision a fortnight ago to allow qualified foreign investors (QFIs) to invest directly. The Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) have now laid down the procedures that investors and intermediaries have to follow in their respective domain.

Amid apprehensions that the new route may open doors for unaccounted money to flood the country, Sebi put the onus on depository participants to ensure adequate identification of the end- beneficiaries of funds entering the country through this route.

“Entities having opaque structure(s) such that the details of ultimate beneficiary are not accessible or where the beneficial owners are ring fenced from each other or where the beneficial owners are ring-fenced with regard to enforcement shall not be allowed to open demat accounts as a QFI,” the Sebi circular said.

It asked the depository participant (DP) to perform appropriate due diligence at the time of account opening and ensure such entities were not allowed to open a demat account.

An express undertaking to this effect shall be obtained from the QFI, Sebi said.

Kotak Mahindra Bank, HSBC, SBI SG, Citibank, Deutsche Bank and India Infoline have registered with Sebi. DPs who have approval for accepting QFI investments in mutual funds will automatically qualify as DPs for equities as well.

For investors, the ordeal begins with obtaining a separate and distinct Permanent Account Number (PAN). The DP will require QFI to file the needed information. Only a KYC-compliant entity will be allowed to invest.

Shares must be held in a designated demat account. Only one demat account is allowed and all transactions can be done through one qualified DP only. However, the QFI will be allowed to open multiple trading accounts with stock-brokers.

The regulator has put a lot of onus on the qualified DPs from KYC to day-to-day due diligence. The DP will have to ensure no other demat account is held by any QFI in any other capacity such as non-resident Indians, before opening a demat account.

In case of any direct or indirect change in ownership structure of the QFI, the DP will have to do fresh assessment of the eligibility, before allowing any further transactions. A QFI will be allowed to change the DP only after closure of the earlier demat account.

The DP will have to open a separate single rupee pool bank account with a designated bank, exclusively for the purpose of investments by QFIs in equity shares in India. Further, the DP will have to ensure that funds of each QFI in the rupee pool account are clearly segregated from each other at all times, according to the RBI circular.

Sebi has put certain restrictions on the shareholding a foreign individual can hold. The QFI and DP will have to ensure the shareholding by a QFI does not exceed five per cent of paid-up equity capital of the company at any point of time. The shareholding of QFIs has to be less than 10 per cent.

Once the aggregate shareholding of QFIs in a company reaches 8 per cent, the firm will be put in the caution list — and no fresh purchases will be allowed without approval of the DPs.