Sebi plans central database on FPIs’ beneficial owners
February 27, 2023
The Securities and Exchange Board of India (Sebi) may revive plans to create a central database or data repository to store beneficial ownership details of foreign portfolio investors (FPIs), according to people in the know.
The proposal to create such a central database was mooted a few years ago by the HR Khan Committee, but it was put on the back burner subsequently.
Earlier this month, Sebi reached out to custodians asking for beneficial ownership details of offshore funds and FPIs against the backdrop of the Adani saga. The regulator has also circulated a list of 10-15 entities to ascertain whether they are investment managers or fund administrators of specific FPIs, according to reports.
Beneficial owners (BOs) are the natural persons who own or control an FPI, and their details are currently captured by depository systems during the processing of the common application form (CAF). The CAF consolidates the FPI registration with Sebi, application for permanent account number (PAN) and know your client (KYC) formalities for opening of bank and securities (demat) accounts in India, into one single master form.
Depositories do not possess historical records for beneficial ownership prior to April 2020, but the same is available with designated depository participants or custodians. This can be provided to the depositories and included in the central database, experts said.
“Sebi can use analytical tools and its surveillance mechanism to identify common investors or beneficial owners of FPIs. The tools can be used on data sourced from the depositories or the depositories can share the data on BOs with custodians, which can report the same to the FPIs for appropriate compliance,” an industry official said.
An email sent to Sebi did not immediately get a response.
Identification and verification of beneficial ownership of FPIs is determined on the basis of ownership/entitlement interest or control, materiality threshold, look-through test or the test of designated ‘senior managing official’ whenever no owner entity can be identified.
“Several FPIs have intricate legal structures consisting of numerous layers. Sebi’s guidelines for identification and disclosure of the ultimate beneficial owners have not been effectively implemented in the past, resulting in minimal follow-through. Consequently, FPIs have been able to limit their disclosures to certain layers, thereby avoiding disclosures in the spirit of the law,” said Sumit Agrawal, founder, Regstreet Law Advisors.
According to Agrawal, Sebi must determine the source of the funds by asking whether the funds are supplied by an entity or individual, or if the individual identified as the BO invested their own money.
“Sebi has enough official channels to turn to but has so far relied on custodians and other service providers for BO information. Some of the existing rules may need to be modified to ensure that service providers can extract the right data,” another industry official said.
Sebi’s analytical tools can be deployed to ensure clubbing norms for FPI investments are adhered to, experts said. Clubbing norms kick in on the basis of common ownership of more than 50% or basis common control. However, FPIs with common investors often channel their investments through different custodians, making it difficult to validate if the investments by the common investors are clubbed or not.
For example, if a person A invests 60% in FPI X and 51% in FPI Y, the investments ought to be clubbed. But the clubbing may not happen if the investments are routed through different custodians and investors do not voluntarily disclose the ownership details. It may also happen that the investor A used different acronyms (a short middle name, for example) while investing through different FPIs, which may result in no clubbing of investment.
Now, suppose FPI X invests 8% in company B and FPI Y invests 9% in B. If the investments were clubbed, FPI X and FPI Y together would be allowed to hold less than 10% in company B. Exceeding this would result in the FPIs either divesting their holding to be below 10% or their investments getting classified as FDI.
Applying clubbing rules can also help prevent investors from taking higher stakes in target companies without triggering appropriate disclosures under provisions of the Sebi (Substantial Acquisition of Shares and Takeover) Regulations, 2011, regulations or listing norms.
“The regulator can develop analytics tools to comb out the common investor, basis nationality, name, location and other details,” the first official quoted above said.
[The Financial Express]