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

“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.

Corrigendum : A earlier version of the copy erroneously said that foreign entities were not required to reveal their stakeholders or contributors to Sebi and provide only the details of the senior managing official of that entity after the PMLA definition was adopted. The actual position is that foreign entities were indeed required to disclose their beneficial owners as per PMLA definition, however, if the beneficial owners could not be identified, the senior management officials had to be identified.