ASIA: Sebi seeks alerts on changes in ‘beneficial ownership’ of FPIs with China links.

As published on economictimes.indiatimes.com, Monday 18 May, 2020.

Mumbai: The Securities and Exchange Board of India (Sebi) has directed custodians and banks to alert the regulator of any change in ‘beneficial ownership’ of foreign portfolio investors (FPI) having links with China.

The instruction from Sebi, which came a few days ago, indicates that the capital market regulator and New Delhi — which has recently hardened its stance on investment from China and neighbouring countries — are keeping a close watch on any shift in control or ownership of ultimate investors in offshore funds.

“Custodians keep record of such data and are generally not required to share with Sebi unless there is a probe. But now, Sebi wants to know whether there is change in BOs of funds in the last few weeks. This specifically relates to FPIs from China and certain jurisdictions,” a market source told ET.

A month ago, custodians (banks and non-bank entities handling fund and securities of overseas funds trading on Indian bourses) were told to give details of ‘ultimate beneficial owners’ of FPIs based in China and Hong Kong. A few days later they were asked to identify FPIs having BOs (or large investors) from a list 11 countries — Pakistan, Taiwan, North Korea, Iran, Myanmar, Mongolia, Bhutan, Nepal, Afghanistan, Bangladesh, and Yemen — many of which have economic and political ties with China.

In regulatory parlance, ‘BO’ in a Sebi-registered FPI are investors who have put 25% or more in the fund; the thresholds are lower – at 15% when the investor is a trust entity and 10% when the FPI is based in a ‘high-risk jurisdiction’ (a categorisation that is left to custodians). However, a BO, even while having a lower stake in the fund, may still have a significant control over the board of directors of the asset management company of the fund, right to appoint majority of directors in the AMC, or be in a position to appoint and influence the senior managers of the fund.

“Sebi probably wants to find out whether BOs directly or indirectly linked to China are taking a foothold in other FPIs. Or, whether a large investor with China connection has gone below the radar following media reports of Sebi collecting information,” said an official with a market intermediary.

Significantly, in an email to all 19 custodians sometime in April, Sebi had said that application of registration of FPIs emanating from China or neighbouring countries or FPIs with BOs from China or neighbouring countries should be referred to the regulator. “But soon after this, Sebi sent another email telling custodians to keep the earlier email in abeyance. May be, the regulator sensed such a directive would not have gone down well and could have been construed as some kind of restriction in the FPI process – similar to the approval process recently introduced in foreign direct investment from countries sharing borders with India,” said the person.

For the last few years, procedures like the FPI registrations, KYC and renewal of licence after every three years are carried out by custodians.

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