The Finance Ministry has exempted Foreign Portfolio Investor (FPI) from providing information about new clients within ten days of their joining. Experts feel such a move will provide a much-needed breather to FPI.
FPI can be in individual or institution from any other country who must register here to invest in the capital market here either as an intermediary or on its own.
“The Central Government in consultation with the regulatory authority, namely the Securities and Exchange Board of India, in the public interest and in the interest of the regulated entity, namely the Foreign Portfolio Investor, hereby directs that the provisions of sub-rule (1A) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 shall not apply to the Foreign Portfolio Investor,” a notification by the Ministry said.
Rule 9 of Prevention of Money-laundering (Maintenance of Records) Rules, 2005 is related to Client Due Diligence. There are two situations in sub-rule (1) Under the first situation. Every reporting entity will identify its clients at the time of commencement of an account-based relationship, verify their identity, and obtain information on the purpose and intended nature of the business relationship. Also, it will determine whether a client is acting on behalf of a beneficial owner, identify the beneficial owner and take all steps to verify the beneficial owner’s identity.
The second situation is related to transactions and other activities. Here, the reporting entity must verify identity while carrying out transactions of an amount equal to or exceeding ₹50,000 or any international money transfer operations.
Now sub-rule 1(A) says every reporting entity will within ten days after the commencement of an account-based relationship with a client, file the electronic copy of the client’s KYC records with the Central KYC Records Registry. FPI has been exempted from this.
According to Sunil Gidwani, Partner with Nangia Andersen LLP, in 2018, SEBI had amended the KYC requirement for Foreign Portfolio Investors (FPIs), requiring them to identify the Beneficial owner (BO) who ultimately owns or controls an FPI. The BO should be identified as per Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (PMLA Rules). The materiality threshold for identification of BOs shall be the same as prescribed in PMLA Rules, i.e: 25 per cent in the case of companies and 15 per cent in the case of partnership firm, trust & unincorporated association of persons.
“While necessary information is obtained by the custodians at the time of registration, in case of any new investor investing into the FPI entity subsequently in the case of multiple tier structures its not easy to determine ultimate owner meeting thresh-hold requirements. The time period of 10 days was too tight to do the necessary due diligence and obtain relevant information from any new investor joining the FPI. The exemption from this 10-day period for FPIs will provide a much-needed breather. One hopes that if any time period is notified separately, it is a reasonable one,” he said.