MUMBAI: A new investment route for foreigners that is akin to participatory notes (P-Notes) could soon emerge if the recommendations of the HR Khan-led committee on easing of foreign portfolio investor(FPI) norms are accepted by the Securities and Exchange Board of India (Sebi).
The committee has recommended allowing private banks to invest on behalf of their clients through individual accounts. This will allow offshore investors, who don’t wish to be registered with Sebi, to invest in India through any foreign bank that is a Sebi-registered FPI.
Untill now, private banks were allowed to invest on behalf of their clients only if they held common portfolio for all the clients. Experts said the scheme could catch the interest of several foreign funds who wish to deploy only a small size of their portfolio to Indian securities and do not want to register themselves with Sebi.
“Not all investors are comfortable to register themselves in India and directly be subject to Indian regulations,” said Suresh Swamy, partner, PWC. “Allowing them to invest in India through private banks will surely trigger interest amongst this section of investors.”
Earlier, private banks were allowed to do only proprietary trades in India. In 2017, Sebi allowed them to invest on behalf of their clients. However, in order to prevent any misuse of the route, Sebi asked them to maintain a common portfolio. The scheme failed to take off as the banks didn’t have the liberty to create customized portfolio for their clients.
“By implementing the recommendation, we can hope to receive potentially significant investments from the hitherto untapped segment of high networth individuals as well as large family offices,” said Sriram Krishnan, head of securities services, Deutsche Bank India.
The route also provides significant flexibility compared to participatoy notes — an offshore instrument through which foreigners can invest in India without being registered — in terms of know your customer (KYC) norms.
P-Note subscribers are required to submit KYC documentation as per Indian anti-money laundering (AML) laws and disclose their end beneficiary. In contrast, investors coming through private banks need to only comply with the KYC norms of their home country.
Unlike P-Notes where the data is submitted to Sebi, the KYC information in this case stays with the global custodians. Hence, it addresses the data privacy concerns of the investors especially the European ones. “The recommendation suggests client KYC to be done as per FPI’s home country norms provided the FPI is from a FATF member country,” said Tejesh Chitlangi, partner, IC Universal Legal. “This will address contentious scenarios wherein there is inconsistency between the Indian KYC laws with those applicable in the FPI’s jurisdiction.”
Private banks who wish to maintain segregated portfolios will only be eligible for registration as Category III FPIs. Currently, they come under the more convenient category II FPI license.
In order to curb any misuse, the panel has recommended custodians to submit the ownership details of their clients to Sebi once in every three months.
Experts say the safeguards are hardly sufficient and the route could sill be misused.
“The KYC is done as per the rules norms their home countries where disclosure of ultimate beneficiary may or may not needed,” said a former senior Sebi official. “Hence the banks will only give the information of the front entity that has invested concealing the actual beneficiary.”
Source- Economic Times.