SEBI tightens KYC norms for FPIs

India's market regulator has re-issued a circular asking for Know Your Client (KYC) compliance of Foreign Portfolio Investors (FPIs). The move is aimed at curbing money laundering, especially ahead of 2019 general election.

Earlier SEBI had asked custodians of foreign funds (FPI funds) to list out investors from ‘high-risk jurisdiction,’ meaning tax-havens or countries which allow round-tripping of money. These are predominately countries which are not members of the Financial Action Task Force (FATF). FATF countries have stricter disclosure standards as they are part of a global co-operative and to restrict money laundering. Top non-FATF countries include Mauritius, Cyprus, British Virgin Islands and the Cayman Islands. During the FPI regime, many Non-Resident Indians (NRIs), as well as resident Indian, set-up offshore institutions to raise funds in these jurisdictions and have been actively investing in Indian stock markets.

SEBI's Know Your Client (KYC) requirements for FPIs issued on April 10, 2018, seeks to identify the ‘Beneficial Owners’ (BO) of FPIs. According to SEBI new guidelines, NRIs or Overseas Citizen of India (OCI) cannot be BOs of FPIs. This move is to restrict NRI investment and control in FPI as NRI-linked foreign portfolio investors are suspected of using the same for money-laundering activities.

FPI association, Asset Management Roundtable of India (AMRI) has claimed that fund managers of Indian origin hold US$75 billion in the Indian stock market, and if SEBI implements the new KYC norm the sum will flow out of the market. The deadline for the compliance is December 31, 2018. AMRI has made a representation to the finance ministry asking it to withdraw the move, warning of dire unintended consequences.

SEBI has refuted the claims calling them ' preposterous and highly irresponsible' and added that it has already extend the deadline for compliance by two months.