• HDFC
• 29 Aug 2018
• Knowledge Centre

HDFC, Tester

The repercussions of the Securities and Exchange Board of India’s (SEBI’s) revised know-your-customer norms for foreign portfolio investors (FPIs) are expected to be felt in October 2018, when they come into effect. A surge in selling is expected at that point, as the new guidelines have met with resistance since the time that they were announced in April 2018, according to a financial daily.

 

Revised Norms

 

SEBI’s new KYC requirements call for the disclosure of additional information to identify the beneficial owners (BOs). Foreign portfolio investors (FPIs) now have to disclose details such as:

 

• BOs’ address,
• Date of birth,
• Tax residency number,
• Social security number, and 
• Passport number.

 

The directive also states that non-resident Indians, overseas citizens of India and persons of Indian origin cannot be beneficial owners (BOs) of foreign portfolio investors (FPIs). Custodians of FPIs and industry lobby groups have voiced their disagreement with the revised norms with the market regulator, stating issues pertaining to privacy.

 

The daily quoted a source as saying, “India’s new KYC norms may clash with global data privacy laws. Investment firms globally, too, are not comfortable with sharing personal information of their employees. Data security is another area of concern. No one is quite sure if India has the right infrastructure in place to ensure adequate security.”

 

Currently, FPIs are subject to a KYC review only if there is any change in information or disclosure. However, with these revised norms, a comprehensive KYC review of FPIs will be done at regular intervals. For example, for high-risk clients, the KYC check will be done on an annual basis, and it would be done once every three years for others.

 

According to the current guidelines, if no beneficial owner can be identified based on controlling ownership, a senior managing official (SMO) should be identified as a BO.

 

Some Issues

 

Industry observers assert that the market regulator should differentiate between the data that needs to be collected from BOs that are owners, and from BOs that are SMEs. In the case of SMOs, minimum information like name, business address and nationality should be sufficient, as they are merely acting in their professional capacity.

 

In February 2018, in order to ease the norms for FPI investment, the market regulator abolished the prior-approval requirement in case of a change in the local custodian.

 

According to the SEBI circular, it has made this move “to ease the access norms for investment by Foreign Portfolio Investors. Taking specific request letter from each FPI regarding change of local custodian may create operational and logistical challenges."

 

In certain cases, mutual fund houses held back the previous month’s trail commissions to distributors for those folios where the KYC-compliance was incomplete, according to the daily.

 

Currently, high-risk clients have to comply with the KYC requirement applicable to category-III foreign portfolio investors. This entails sharing information like an audited annual financial statement or a certificate from an auditor certifying their net worth.