Sebi tightens KYC norms for ODI subscriptions of foreign portfolio investors

Market regulator Securities and Exchange Board of India (Sebi) has revised KYC (Know Your Client) norms for offshore derivative instruments (ODI) subscriptions by foreign portfolio investors, including transferability of ODIs, reporting of suspicious transactions, periodic review of systems and modified ODI reporting format.

Sebi said this has been done in order to bring about uniformity and increase the transparency in the systems and procedures adopted by the ODI issuers to comply with regulatory conditions.

Sebi said it had held discussions with the stakeholders and the new rules have been framed on the basis of inputs received during the discussion process.

Accordingly, Sebi board at its meeting held on 19 May 2016 decided that ODI issuers shall be guided by the same KYC (know your client) norms as applicable to Indian market participants and intermediaries.

Sebi had, on 24 November 2014, issued a circular aligning the applicable eligibility and investment norms of FPI regime with norms applicable for subscription through the ODI route.

With regard to KYC of ODI subscribers, they will now have to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the threshold as defined under Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, ie, 25 per cent in case of a company and 15 per cent in case of partnership firms/ trusts/ unincorporated bodies.

ODI issuers will also be required to identify and verify the person(s) who control the operations, when no beneficial owner is identified based on the aforesaid materiality threshold.

Sebi has clarified that the definition of the term ''Beneficial Owner'' shall be as per sub-rule (3) of Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

Sebi has also prescribed the KYC documentation to be obtained by ODI Issuers from each of such ODI subscribers in respect of beneficial owner who holds above the threshold limits in such ODI.

The materiality threshold to identify the beneficial owner should be first applied at the ODI subscriber level and look through principle should be applied to identify the beneficial owner of the material shareholder/ owner entity.

Only beneficial owner with holdings equal and above the materiality thresholds in the subscriber need to be identified through the aforesaid look through principle. In such cases, identity and address proof.

Where no material shareholder/owner entity is identified in the ODI subscriber using the materiality threshold, the identity and address proof of the relevant natural person who holds the position of senior managing official of the material shareholder/owner entity should be obtained.

ODI issuer should ensure that any transfer of offshore derivative instruments issued by or on its behalf is carried out subject to the following conditions that such offshore derivative instruments are transferred only to persons in accordance with Regulation 22 (1) of SEBI (Foreign Portfolio Investors) Regulations, 2014; and that prior consent of the foreign portfolio investor is obtained for such transfer, unless the person to whom the offshore derivative instruments are to be transferred to are pre-approved by the foreign portfolio investor.

Necessary changes in Regulation 22(2) of SEBI (FPI) Regulations, 2014 are separately being carried out.

The ODI issuers have to maintain with them the KYC documents as prescribed above at all times and should be made available to SEBI on demand.

The KYC review shall be done on the basis of the risk criteria as determined by the ODI issuers, as follows:

(a) At the time of on-boarding and once every three years for low risk clients.

(b) At the time of on-boarding and every year for all other clients.

Sebi has clarified that in case of existing ODI subscriber, the KYC review should be done within three years for low risk clients and one year for all other clients from the effective date of this circular and accordingly reported in revised ODI reporting format.