Sebi looks to plug gaps in PMLA, FII rules with ownership disclosure proposal for FPIs

.

The latest consultation paper from Sebi, seeking additional disclosures about ownership details from high-risk foreign portfolio investors (FPIs) aims to plug a gap in the Prevention of Money Laundering Act (PMLA) as well as the existing FII regulations on ultimate beneficiary ownership.

The regulator has proposed that high-risk FPIs owning 50 percent or more of their equity assets under management in a single corporate entity will have to make additional disclosures around the ownership of, and economic interest in, and control of such funds. The disclosures will have to be made up to the level of all natural persons and/ or public retail funds or large public listed entities. The same has also been proposed for FPIs with an overall holding in Indian equity markets of over Rs 25,000 crore.

In 2018, the PML Act amended the definition of ultimate beneficial owner and considered the beneficial owner as the ultimate beneficial owner. Soon after, Sebi also removed the clause regarding mandatory disclosure of ultimate beneficial owner in 2019. Foreign entities were required to reveal their stakeholders or contributors to Sebi accordingly and if there was no identifiable beneficial owner, provide details of the senior managing official of that entity.

PML Rules specify thresholds based on ownership, or entitlement to capital or profits (i.e. economic interest), for identifying the beneficiary owner of legal entities. These are 10 percent for companies and trusts, and 15 percent for partnerships. It also specifies that BO includes those natural persons who exercise ultimate effective control over a legal person or arrangement.

“While BO details based on control or fund ownership have generally been made available, it is often observed that no natural person is identified as the BO of FPIs based on economic interest, since each investor entity in the FPI is generally found to be below the threshold prescribed under PML Rules,” the Sebi consultation paper said.

“However, there is a possibility that the same natural person holds a significant aggregate economic interest in the FPI through different investment entities, each of which are individually below the threshold for identification as a BO. Since granular details of all underlying investors with ownership, economic, or control interest in entities below the threshold is currently not required to be made available with the DDP/custodian, it is not possible to determine whether the above scenario may be playing out,” the paper said.

This often leads to a situation where the person seemingly in control or the senior managing official is identified as the beneficiary owner of the FPI when, in fact, the control is with another entity (such as the investment manager/ trustee etc.) through arrangements such as voting shares/management shares.

Consequently, while in compliance with the letter of regulations, the actual investing entities with economic interest may not be identified as beneficiary owners of the FPI.

In the consultation paper floated today, the regulatgor has said that the identification of all holders of ownership, economic, and control rights in high-risk FPIs should be done on a look-through basis down to the level of natural persons, public retail funds, or large listed corporates. Most importantly, this must be done “without applying any materiality thresholds, and notwithstanding any equivalent PMLA rules or secrecy laws that may be applicable in other jurisdictions of their domicile.”

In other words, if an FPI meets any of the two criteria mentioned above — 50 percent holding in a single corporate entity or Rs 25,000 crore plus of India equity assets — it will need to disclose ownership details of every entity.