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Foreign funds reluctant to disclose ultimate beneficial owners

By Sugata Ghosh

Mumbai: Foreign funds are reluctant to disclose their ultimate beneficial owners (UBOs) to the Indian regulator.

A large number of foreign portfolio investors (FPIs) have voiced reservations to capital market regulator Sebi about naming the UBOs — a new disclosure rule for offshore investors — as it may be onerous, unnecessary, and in many cases amount to a breach of privacy.

While Sebi probably believes that persons handling drug or terror money, indulging in sharp practices and violating anti-money laundering rules cannot be allowed to hide behind institutions, the offshore funds think that identifying the ‘last natural person’ or pinpointing ‘control’ can be virtually impossible in many funds.

The beneficial owner, according to regulations, could be investors or shareholders of the asset management company of a fund — someone who is in a position to exercise control over the FPI; the ownership threshold is 25 per cent if the FPI is a company and 15 per cent if it is a trust or partnership — in according with Rule 9 of the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (PML Rules).

Regulatory experts ET spoke to indicated that the new regulation is a tricky terrain, and Sebi and investors may have to sit together to find a way out.

An industry body representing the FPIs recently met Sebi to express its views. According to Sebi’s directive, FPIs will have to identify and disclose UBOs by October.

According to Anish Thacker, partner, Tax and Regulatory Services at EY, “For the regulator, knowing the UBO, i.e. the natural person behind collective investment platforms is very critical. For FPIs with institutional investors, this is difficult and cumbersome. As part of the KYC requirements in the respective FPI’s home jurisdiction, the drill down to the natural person may not be required. Plus, it may need to be seen if local regulations permit sharing the data.”

It is therefore important, says Thacker, FPIs and the regulator discuss and come up with a mutually acceptable position.

The issues that have cropped up are: how to spot UBOs if the investor or the stakeholder in a fund AMC is an institutional investor or a pass through vehicle? Will senior management officials of a fund be willing to be named as UBOs — as per the rule — if no individuals can be identified to have a clear ‘control’ over the fund?

“Also, since several FPIs have layered ownership/control client structures, it may be very difficult to accurately determine the ultimate BO who is the natural person, as there may be a series of investment agreements at the back-end and such agreements may contain a confidentiality clause which can break the disclosure chain,” said Tejesh Chitlangi, partner at IC Universal Legal.

In case of participatory notes or PNs — which are offshore derivatives with Indian stocks or indices as underlier and perceived as more opaque — FPIs enjoy upfront contractual rights to seek details of the natural persons who are the UBOs of PNs.

“But the same may not always hold true for the regular investor clients of FPIs…Here, FPIs rely on requisite contractual declarations/representations from their immediate investors rather than having the ability to seek the ultimate owner’s information itself, due to confidentiality concerns,” said Chitlangi.

UBOs will have to share either passport number or taxpayer identification number, or the social security number. “But if other countries require foreign investors to disclose such information, why should it be any different for India? “Rule 9 of the PMLA Rules, 2005 requires an intermediary to maintain various details of the BO, including the record of identity and address, financial status etc. The beneficial owner identification requirements are also part of the recommendations of the FATF which is an international policy making body with over 30 member countries, including India,” said Rajesh H. Gandhi, partner at Deloitte Haskins & Sells LLP.

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Via:: Economic Times – Stocks


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