Pankaj Chaudhary, the State Minister of Finance told the Parliament recently that entities related to Adani Group are being investigated by the securities regulator, SEBI, the customs authorities, Directorate of Revenue Intelligence with regard to compliance of ‘know-your-customer’ norms. The involvement of Adani Group, however, remains unclear.

The investigation row came to light in June when National Securities Depository Limited (NSDL) allegedly froze three Mauritius-based-Foreign Portfolio Investors (FPIs) that hold majority stakes in Adani Group. This has triggered an intense debate over the powers of NSDL on freezing an account. This has also raised prominent concerns with regard to the framework scrutiny of KYC (know-your-client) status of the sub-accounts – the foreign persons & corporates under FPI.

Foreign Portfolio Investors

FPI is an investment done by non-residents in Indian securities market including shares, government bonds, convertible shares and corporate bonds. NSDL, the depository portal for National Stock Exchange (NSE) incorporated by SEBI, is authorised to register and monitor FPIs including sub-accounts on its behalf.

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FPIs’ investments have to comply with the ‘operational guidelines for FPIs’ of SEBI, which are in sync with global regulations such as the Foreign Account Tax Compliance Act of the US, and the global ‘common reporting standards’. Compliance with KYC norms is a key requirement.

The three Mauritius-based funds fall under ‘Category I of FPI sub-accounts’, which includes government-related investors, regulated entities, FATF regulated entities, or entities regulated by FATF members.

KYC criteria applicable for FPIs include the memorandum and articles of association, other constitutive documents, address proof, PAN card, power of attorney, Authorised Signatory list and the Ultimate Beneficial Owners (UBOs). Importantly, the FPIs must disclose details of Beneficial Owners (BOs) as per Rule-9, Prevention of Money Laundering (Maintenance of Records) Rules, 2005.

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The Adani group is embroiled in the controversy as a BO of the three aforementioned FPIs. The official reports are yet to be released by relevant authorities, including SEBI.

SEBI’s guidelines

Under SEBI’s guidelines, Mauritius is one of the countries subject to close monitoring – the funds are reviewed annually, as against those from low-risk countries, where the funds are reviewed once in three years.

When any FPI sub-account is found non-compliant with documentation, code of ethics, and other obligations by the participant, the disciplinary committee of Board of Directors (BOD) is empowered to penalise, suspend or freeze any participant’s account as a penal action, under NSDL Bye-laws and SEBI (Depositories and Participants) Regulations’ 96.

Further, on April 7, NSDL made KYC attributes mandatory for all categories of clients; non-compliance would lead to closing of all demat transactions except for settlement of open positions.

Part-A of the operational guidelines’ 19 that provides for processing of FPI applications affirms such penal action upon failure of proper and adequate disclosure, including common ownership and details of key persons and employees. SEBI had extended this compliance period upto July 2021, failing which the powers of depositary under the penal ambit of NSDL Business rules shall be initiated.

One can thus infer that SEBI’s stance on failure of compliance is clear, prohibiting the non-compliant FPIs from making any fresh purchases until its position in the Indian securities market is liquidated. The commotion surrounding freezing of Albula, Cresta and APMS Investment fund accounts and its impact on the plummeting stocks of the Adani group persists.

But the action taken on account of non-compliance with KYC requirements and inadequate disclosure shall serve as a warning for other FPI sub-accounts that have not complied with regulatory directives.

(The authors are corporate lawyers)

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