Foreign portfolio investors (FPIs) have received a welcome simplification of rules from the Securities & Exchange Board of India (SEBI), India's capital market regulator. The rules pertain to the identification of senior management officials (SMOs) in offshore funds, which has become a complex issue due to the multi-layered structure of many FPIs. Initially, SEBI had stated that the key official in the topmost entity of the FPI structure would be considered the SMO. However, this was met with resistance from top officials in New York and London who did not want to be named as SMOs for FPIs located in tax havens and unrelated to their operations.
In response to this resistance, SEBI has clarified that key officials in the parent entity, at the highest level of the FPI chain, do not need to be named as SMOs. Instead, the senior official in the registered FPI or the key official of the entity that controls or owns the FPI may be named the SMO. This change is expected to benefit many FPIs that must disclose their SMOs by the end of September. This clarification allows FPIs and custodians to determine which official in the FPI chain should be designated as the SMO.
SEBI's latest communication also specifies that directors of the FPI entity in locations like Mauritius can be named as SMOs. Additionally, if there is an asset manager in Mauritius holding 'management shares' in an FPI vehicle, the senior official of the asset management company can be the SMO. This flexibility gives FPIs greater discretion in identifying their SMOs within their complex structures.
It's important to note that FPIs often structure their investments through multiple entities, especially when dealing with investors who may prefer not to invest directly in certain jurisdictions. For instance, American investors may choose to invest in a pooling vehicle in the United States, which then invests in an FPI entity located in a jurisdiction like Mauritius or Singapore. Such structures allow FPIs to benefit from tax treaties between these jurisdictions and India.
This simplification comes at a time when SEBI has been tightening rules to identify the beneficial owners (BOs) of FPIs. The BO is the ultimate natural person who owns or controls an FPI. SEBI has lowered the threshold for identifying BOs from 25% (for funds structured as companies) and 15% (for funds under a trust) to 10%. This means that FPIs must now disclose the identities of all ultimate investors who own or have a share of 10% or more in the fund to their custodian banks, who will then share this information with SEBI.
The clarification regarding SMOs and the change in BO identification rules are part of SEBI's efforts to enhance transparency and oversight in the FPI space, particularly in light of concerns about beneficial ownership and adherence to regulations.
In conclusion, SEBI's recent clarification regarding SMOs provides much-needed flexibility to FPIs in identifying key officials within their complex structures, relieving foreign investors navigating India's regulatory landscape.
