A lobby representing foreign portfolio investors will approach India's markets regulator seeking a review of recently tightened requirements for beneficial owners of offshore funds, according to two sources.
Concerns surfaced over offshore investments in Adani Group companies in January prompting a directive from the Securities and Exchange Board of India (SEBI) to foreign banks that act as custodians for such investors.
A consensus is being formed to send a representation to SEBI via the Asia Securities Industry & Financial Markets Association (ASIFMA), said one of the sources, an official with one such foreign bank.
The person spoke on condition of anonymity as discussions are private.
SEBI did not immediately respond to emailed Reuters questions.
ASIFMA said in an emailed response that it was still following up with its members.
In the first week of February, SEBI wrote to custodian banks asking them to reach out to their FPI clients by March and share details of beneficial owners by the end of September.
Failing to do so would require funds to unwind their position by March 2024, Reuters reported.
The regulator went a step further and stated that where there is no clear beneficial owner, a senior official of the parent fund must be listed as the ultimate beneficial owner and could be held accountable if the subsidiary fund runs afoul of India's laws.
This, the sources said, has worried investors.
"Giving a beneficial owner or a fund’s senior official details is a uniform requirement across jurisdictions such as Hong Kong, Singapore," said the first source. "What makes India an outlier is the requirement to provide the parent fund’s senior official details.”
SEBI has asked that these details be provided for already registered funds and any new funds before they are registered, according to a regulatory official, who also spoke on condition of anonymity.
Under Indian law, an ultimate beneficial owner is defined as one which holds 25% of the fund.
For risky jurisdictions, such as those not compliant with the global Financial Action Taskforce, the threshold is 10%.
If the fund does not have investors meeting the threshold, a senior manager is labeled as a beneficial owner.
"Identifying a senior officer of the parent fund as a beneficial owner can be chalked up to an enhanced KYC (know your customer) requirement but we are concerned about the added accountability," said the second source, a foreign banker.
“If a person who does not have a say in the decision-making process of a fund is named and held accountable it can stall the normal functioning of the fund,” said Richie Sancheti, founder of Richie Sacheti Associates, a law firm specialising in fund structures.
SEBI is also pushing for greater cooperation from offshore jurisdictions via the G20 platform.
"Countries such as Mauritius, UAE, contribute a lot towards foreign flows in India but are not FATF member countries," said the regulatory official.
SEBI is interested in looking into "whether the G20 platform could be used to increase cooperation for investigations and information exchange from non-FATF member countries", the official said.
