FPIs must report changes in control, structure in 7 days

The government, in a notification issued on Wednesday, said that offshore funds will have to inform their custodians within seven working days of any ‘direct or indirect change’ in their control, ownership, and structure.

Custodians are banks and non-bank institutions which hold the securities and cash account of FPIs as well undertake the ‘know your customer’ procedures under the anti-money laundering rules.

The custodians in turn will have to alert the Securities and Exchange Board of India (Sebi) within two days all such ‘material changes’ reported by their FPI clients.

“It’s evident the capital market regulator wants to keep a closer watch on FPIs. This would call for certain changes in the master circular of FPIs. Sebi has recently communicated the decision to tighten the beneficial ownership rule. The reporting timeline has now been clearly laid down,” said Prakhar Dua who leads the financial services and regulatory practices at law firm Nishith Desai Associates.

Besides a change in the ‘beneficial ownership’, a change in the asset management company, key officials and directors could be considered as ‘material change’ by the regulator.

The ultimate beneficial owner (BO) is the last natural person owning or having a share of 10% to 15% in an FPI. The earlier threshold for determining BO was recently lowered from 25% to 10% for funds structured as companies, while it was brought down to 15% for FPIs formed as trusts. Till now, the 10% threshold was applicable only for funds which were based in ‘high-risk’ jurisdictions.An FPI vehicle incorporated in a tax haven like Mauritius or Singapore is often held through multiple layers — the Mauritius entity may be owned by a company in Luxembourg, which in turn is controlled by an US company. Since the custodian is supposed to ‘look through’ these multiple layers of ownership to identify the BO, any change in the holding pattern can cause an indirect change in the ownership.

An FPI, registered with Sebi, has to renew its licence every three years by paying a little less than $3,000. Along with filing a common application form, a new FPI has to generate a permanent account number, and submit a set of documents like agreements with custodian and complete KYC formalities which includes sharing BO details. At present, the custodian informs Sebi if there is a six-month delay by an FPI client in sharing key information.

According to the notification, Sebi would spell out from time to time the additional documents that a fund may have to share. About a month ago, Sebi told custodian banks to share the BO details of FPIs as on March 31, 2023, by September. Soon, after an amendment of the rules under the PMLA lowered the cut-off levels for BOs. The regulator also told custodians to disclose the names of senior management officials and asset managers of the fund.

The spate of changes in the BO rule comes in the wake of allegations by the US short-seller Hindenburg against Adani group firms. It is felt that that a lower BO limit (to 10%) would make it tougher for those who were splitting legal ownership to mask their identities and stay below the radar.