Shruti RajanPartner
Khyati GoelSenior Associate
Harishankar RaghunathAssociate
Key Developments
-
Reporting entities are required to conduct increased due diligence of prospective clients due to the revised beneficial ownership threshold of 10% for companies and trusts
In a move likely to increase the compliance burden significantly for Foreign Portfolio Investors (FPI), the government has reduced the threshold for beneficial ownership, necessitating a more granular disclosure to the regulators. By amending the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, the threshold of beneficial ownership has been reduced from 25% to 10% for companies, and from 15% to 10% for trusts. Consequently, reporting entities now must verify the beneficial owner of a prospective client, defined as an entity that has an ownership or entitlement to more than 10% of the shares/capital/profits of the company client. To enable this, the reporting entity will be empowered to request information regarding persons holding senior management positions, and the registered office/principal place of business of the client.
Earlier this year, the Securities and Exchange Board of India (SEBI) had also written to designated depository participants (DDP) mandating the identification of the natural person who is the beneficial owner of FPIs, or in its absence, the senior management official of the legal entity at the end of the chain of the beneficial arrangement. All FPIs must ensure that accurate beneficial ownership information is given to the DDPs by 30 September 2023, failing which the registration of the concerned FPI is liable to be cancelled.
-
Foreign portfolio investors are mandated to report material changes in already furnished information in seven days instead of six months
In a departure from global norms, SEBI has slashed the timelines for reporting material changes in already furnished information to seven days for FPIs. This is likely to cause a slowdown in the number of new FPI registrations in the coming months and increase the compliance burden on existing FPIs.
The reduced reporting timeline prescribed through SEBI (Foreign Portfolio Investors) (Amendment) Regulations, 2023 applies to material changes in information that had been furnished earlier, including direct or indirect changes in -
- structure,
- ownership,
- control, and
- investor group.
The investor group has also been vested with the obligation to report to the DDP within seven working days of any direct or indirect changes in the above categories. Depository participants have been given two working days to report to SEBI any material change in the information furnished, including pending litigation and regulatory proceedings.
These regulatory changes are expected to have a ripple effect throughout the industry, with market participants noting that the stringency of the regulations is out of sync with global norms and detrimental to the ease of doing business.
-
Stockbroker and clearing member funds to be upstreamed on end-of-day basis
To contain credit risk and protect client funds, SEBI has mandated that upstreaming of client funds in the possession of stockbrokers and clearing members be done on an end-of-day basis. This is expected to reduce the risk in case of a stockbroker default, and is a move towards boosting investor confidence. However, from the perspective of stockbrokers and clearing members who would normally be able to earn interest off this corpus, this would mean a significant loss of float income.
SEBI green-lit this proposal in an omnibus board meeting (SEBI Board Meeting) on 29 March 2023. The framework is proposed to be implemented with a glide path across two phases, with the first phase expected to be implemented from 1 July 2023.
-
SEBI-regulated entities to follow new cybersecurity practices
In light of the increasing sophistication of technological threats and the risk posed by a singular cyber incident to the overall health of the financial markets due to the inter-connectedness of today’s financial entities, the Indian Computer Emergency Response Team has put in place cybersecurity best practices to be adhered to by all SEBI regulated entities. These entities must record compliance with these best practices as part of their annual cybersecurity audit. Failure to do so could result in regulatory action being initiated. SEBI has followed this up with mandating certain cyber security and cyber resilience measures for portfolio managers managing assets worth INR 3000 crore or more.
-
Foreign nationals and non-resident Indians from G20 countries can now use Unified Payments Interface/Unified Payments Interface-linked prepaid payment instruments on their India visits for merchant payments
In a major relief to travellers to India, foreign nationals and NRIs from G20 countries are now allowed to access the UPI facility and hold UPI-linked prepaid payment instruments (PPI). The RBI is implementing this change, brought in through an amendment to the Master Directions on PPIs, in a phased manner. Initially, this facility will be extended to travellers from the G20 countries at select international airports for their merchant payments (P2M) while they are in the country. This was subsequently enabled across all entry points in the country.
PPIs can be issued after physical verification of the passport and visa of the customers at the point of issuance, and loading and reloading of such PPIs shall be against receipt of forex by cash or through any payment instrument. As such, this necessarily involves onboarding at physical touchpoints at airports which is different from the existing digital onboarding process for other PPI issuances. The amount outstanding at any point in such PPIs cannot exceed INR 2,00,000.
Over the next quarter, we can expect SEBI to continue aggressively cracking down on practices that detrimentally affect investor rights and bring into effect the sweeping changes contemplated in the SEBI Board meeting, such as allowing self-sponsored asset management companies to enter the mutual fund business, regulation of index providers, and mandating entities to verify market rumours. We also expect the market regulator to operationalise the amendments to the SEBI PIT Regulations effecting the inclusion of mutual fund units in the insider trading framework (To read our detailed update on this development, click here.). The introduction of these amendments is expected to bring about teething compliance issues and will require a reorientation of reporting entities’ existing monitoring mechanisms.
