Foreign portfolio investors are rattled by SEBI’s new strictures on know-your-client (KYC) norms. Nearly 6,000 FPIs out of around 8,000, which are registered as Category II funds and so far exempt from rigorous KYC reporting, are now being subjected to it.

The fact that SEBI was likely to seek documents such as passport, photos or such personal proof to check the authenticity of the beneficial owner (BO) has scared fund managers. SEBI’s new circular was going against the principal of “ease of access in Indian markets,” experts said.

SEBI has asked funds under Category II and III to report, within six months, the BOs or ultimate persons controlling the entity. Category II FPIs largely include regulated institutions, persons, broad-based funds and university, pension and endowment funds.

Most of these were so far exempt from rigorous KYC requirements, such as submitting name and personal identity proof of BO. But SEBI said it can call for such details.

“SEBI’s latest circular is viewed as reversal of ease of (market) access norms,” said Suresh Swamy, Partner Financial Services, PwC. “Privacy issue is a big concern globally and fund managers may not be comfortable in sharing personal documents. A large number of FPIs have expressed concern about the new requirements.”

Curbing money laundering

SEBI has defined BOs and barred non-resident Indians (NRI)s and persons of Indian origin (PIOs) from holding beneficial ownership in FPIs. The aim could be to check money laundering via overseas vehicles but it could hurt the prospects of Indian fund managers. It is a known fact that the BO of participatory notes, now banned by SEBI, and global depository receipts were Indian promoters.

New rules state that in an FPI structured as a company, a person owning 25 per cent stake would be considered BO and if it is a partnership firm then a person owning 15 per cent will be BO. For funds originating from high-risk jurisdictions the threshold is 10 per cent.

‘May trigger market sell-off’

“The imposed restriction on a BO (essentially anyone holding more than 25 per cent interest) not to be an NRI/PIO or Indian resident could adversely impact several Category II FPIs, which hitherto were not subjected to caps other than fulfilling the broad-based requirement,” said Siddharth Shah, Partner, Khaitan & Co.

“Many may fall foul of (these) conditions and be compelled to bring down (their) individual ownership, which may trigger a market sell-off. Bringing down the permissible cap to 24 per cent from 49 per cent for Category III FPIs could impact a large number of start-ups of India funds, which significantly rely on NRI capital,” Siddharth added.

Swamy is of the view that the SEBI circular does not seem to consider certain realities. “For instance, aggregators holding units as nominee for their clients is very common and funds do not have access to client-level information in most cases.”

Estimates suggest around 150-170 FPIs, which are promoted by PIOs, are now facing the prospects of being shut down.