The urgency to name a key official in an FPI is felt as it is often not possible to know who calls the shots in a fund which is often structured in multiple layers, with each vehicle in separate jurisdictions. Under the circumstances, the regulator had earlier said that the key official in the apex vehicle, which is at the top of the FPI chain, would be considered as the SMO.
This did not go down well with most funds as senior officials of the top entity in New York and London were reluctant to be named as SMOs of a Mauritius or Singapore FPI vehicle, several layers below. Besides, these officials were not involved in the running of a FPI formed in a tax haven to trade on Indian stock exchanges.
Sensing the resistance among funds, the regulator has now clarified that key officials in the parent entity, at the top of an FPI chain, need not be named as SMO. In an email to FPI custodians on August 30, the Securities & Exchange Board of India (SEBI) said that the senior official in the registered FPI or the key official of the entity which controls or owns the FPI may be named as the SMO, two persons aware of the communication told ET.
“Only in cases where a branch of a bank is registered as an FPI with SEBI, the key official of the parent bank has to be named as SMO. This was probably the original intent of the regulator. It has now been made clear. This would help a lot of FPIs which have to disclose their SMOs by end September,” said one of the persons.Thus, according to SEBI’s latest communication, the directors of the FPI entity in Mauritius can be named as SMOs. Or, if there is an asset manager in Mauritius holding ‘management shares’ in a Mauritius FPI vehicle, then the senior official of the asset management company can be the SMO. (Management shares give voting rights, as against participatory or ordinary shares that give only economic rights).
FPIs are often structured through several vehicles. American investors, who may not be willing to invest directly in an entity in Mauritius, would prefer putting money in a pooling vehicle in Delaware, with the Delaware entity investing in another vehicle (recognised as an FPI by SEBI) in Mauritius or Singapore — destinations which have tax-treaties with India.”With this SEBI has left to FPIs and custodians to decide which official of which entity in the FPI chain would be the SMO. However, in cases where an FPI is a sub-fund belonging to an umbrella fund, then a senior official of the umbrella fund will be the SMO,” said an official with a custodian.
The SEBI spokesperson did not comment on the matter.
There are more than 11,000 FPIs registered with SEBI. Ever since the American short-seller Hindenburg aired its allegations against the Adani group in January, SEBI has tightened rules to spot the true beneficial owners (BOs) — or, the last natural persons who own or control an FPI. The term ‘BO’, borrowed from the Prevention of Money Laundering Act (PMLA), refers to persons having a certain minimum share in the fund pool.
In an email in February this year SEBI had said that in case no natural person can be identified as BO, the SMO(s) of the legal entity at the end of the chain of the legal arrangement need(s) to be identified as the BO(s) of the FPI. Since then several fund lobbies had been asking SEBI to tweak the SMO identification rule.
Soon after the SMO rule, the regulation for identification of BOs was tightened.
The threshold for BO in an FPI was lowered to 10% as against the earlier levels of 25% (for funds structured as companies) and 15% (for funds under a trust).
With this, FPIs have to now reveal the identities of all ultimate investors owning or having a share of 10% or more in the fund to their custodian banks who in turn will periodically share the information with SEBI.
Till then, the 10% threshold for determining BO was applicable only for funds incorporated in `high-risk’ jurisdictions or in countries in the watchlist of international organisations.