International AML update for India

At a glance

• The threshold to identify beneficial owners has been lowered to 10% of the controlling ownership or interest held in a company or Trust.
• The timeline for Foreign Portfolio Investors (FPIs) to report changes / rectifications / investor group information to Designated Depositary Participant (DDP) has been reduced to 7 days. In turn, DDP must inform Securities and Exchange Board of India (SEBI) within 2 working days of becoming aware.

FPI registration can now be granted using scanned copies of certified supporting documents (to be followed by originals) and digitally signed documents.

A closer look
 

Amendments in Prevention of Money Laundering (PMLA) Rules

The Government of India has amended the PMLA Rules dated 7 March 2023; the key amendments impacting clients are as follows:

Change in threshold to identify beneficial owner(s) of a company

• Previous criteria to identify beneficial owner(s): Where the client (e.g., FPI) is a company, the beneficial owner is the natural person(s), who, whether acting alone or together, or through one or more juridical person, has a controlling ownership interest or who exercises control through other means. The controlling ownership interest means ownership of or entitlement to more than 25% of shares or capital or profits of the company. However, if the client is located in a country identified as a “high-risk jurisdiction” (by the respective local custodian, bank, etc.), the threshold is instead 10%.
• Revised criteria to identify beneficial owner(s): The controlling ownership interest threshold to identify beneficial owners has been lowered to 10% in all cases.

Change in threshold to identify beneficial owner(s) of a Trust

• Previous criteria to identify beneficial owner(s): Where the client is a Trust, the identification of beneficial owner(s) shall include identification of the author of the Trust, the trustee, all beneficiaries with 15% or more interest in the Trust and any other natural person exercising ultimate effective control over the Trust through a chain of control or ownership. However, if the Trust is set up in a country identified as a “high-risk jurisdiction” (by the respective local custodian, bank, etc.), the threshold is instead 10%.
• Revised criteria to identify beneficial owner(s): The controlling ownership interest threshold to identify beneficial owners has been lowered to 10% in all cases.
  
  

Amendment in Foreign Portfolio Investors (FPI) Regulations

Securities and Exchange Board of India (SEBI) has changed the onboarding process and required documentation/information dated 27 March 2023 to be submitted by FPIs. The key changes are as follows:

Compression of timeline in reporting changes/rectifications to SEBI and DDP

Under the current FPI Regulations, an FPI must “forthwith” inform (without delay) the following to SEBI and the concerned Designated Depository Participant (DDP):

• Any information submitted previously that is found to be false or misleading in any material respect
• Any material changes in the information submitted previously, including any direct or indirect change in its structure or ownership or control
• Any penalty, pending litigation or proceedings, findings of inspections or investigations for which action may have been taken or is in the process of being taken by an overseas regulator against the FPI

Under the amended regulations, an FPI is required to inform SEBI and the concerned DDP (as applicable) “as soon as possible, but not later than 7 working days” of the occurrence of any of the above event.

Further, the concerned DDP must inform SEBI of the above occurrence of events within 2 working days of it becoming aware of the event.

Investor group information

FPIs are obligated to ensure that accurate details regarding its investor group are maintained with the relevant DDP at all times. Further, if there is any direct or indirect change in investor group information or structure or common ownership or control, the FPI must inform the same to its DDP “as soon as possible but not later than 7 working days” of the occurrence of the change.

Streamlining the onboarding process

• DDPs can now grant registration to FPIs based on scanned copies of an executed Common Application Form (CAF) and scanned copies of certified supporting documents and payment of applicable fees. However, FPIs would be able to transact in Indian securities only after the physical documents are submitted to and verified by the DDP.
• FPIs can digitally sign the CAF and other related documents using digital signatures in accordance with Indian Information Technology Act, 2000.
• In lieu of physical attestation of documents (submitted along with CAF), FPIs can arrange for authentication of documents through SWIFT message (e.g., SWIFT MT 599) submitted by banks, financial institutions to the DDP, or custodian.
  
  

Amendment in PMLA rules – Additional information to be submitted by clients

An amendment in Indian PMLA rules require the following types of clients (which should include residents and non-residents) to provide additional information to Indian service providers:

• Where the client is a company, the names of the relevant persons holding senior management positions must be provided in addition to the information and documents being submitted concurrently. Also, the details of the registered office of the company and its principal place of business must be provided.
• Where the client is a partnership firm, the names of the partners must be provided, in addition to the existing information and documents being submitted concurrently. Also, the details of the registered office of the company and its principal place of business must be provided.
• Where the client is a Trust, the names of the beneficiaries, trustees, settlor and authors of the Trust and the address of the registered office of the Trust must be provided in addition to the existing information and documents being submitted concurrently. Further, a list of trustees and certain documents for those discharging role as trustee and authorized to transact on behalf of the Trust must be provided.

Though the above amendment has been made in the PMLA rules, no corresponding amendment is made in the SEBI Master Circular for FPIs, DDPs and eligible foreign investors dated 19 December 2022.

Therefore, as of now, the Indian DDPs/custodians may not insist on the provision of such additional information.

Conclusion

The revised norms are in effect from the circular’s issuance date. FPIs must submit additional information to their DDPs in India and also need to establish the requisite processes and controls whereby they identify beneficial owners in line with the revised thresholds. Also, any change in material information must be reported to the DDPs / SEBI (as relevant) within the prescribed timeline of 7 working days.