This article is written by Shreya Kalantri pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Dhruv Shah (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
Foreign portfolio investment (FPI) comprises securities and other monetary resources held by investors in another country. Foreign portfolio investors are often exposed to increased share price volatility, which is riskier, and investors hope to receive compensation for the risk they take.
Know Your Customer (KYC) are a bunch of norms utilized inside the investment and monetary administrations industry to verify customers, their risk profiles, and monetary profile. The FPI regime, which was established in 2014, enabled the adoption of a risk-based KYC mechanism, in which the paperwork requirements change depending on the FPI category. KYC documentation prerequisite changes as per the various categories of the FPI.
FPI is divided into 3 categories
Category I: This kind of FPI includes government/government-related organisations such as central banks and international agencies among others.
Category II: This includes mutual funds, insurance companies, banks, and pension funds.
Category III: This type of foreign portfolio investment includes all other FPIs that don’t fall into the first two categories. They may include charitable organisations such as trusts or societies.
KYC documents required for FPI
Category I (high-risk jurisdiction)
At applicant level
- Constitutive documents like MoA, COI, prospectus, etc are required.
- Address proof like power of attorney (POA), mentioning the address is acceptable as address proof.
- Name, mobile number, email id, PAN and income range are required.
- FATCA(Foreign Account Tax Compliance Act) / CRS form is required.
- KYC Form/CAF is required.
Senior management
- A list of directors as part of the KYC form is required.
Authorised signatories
- List & Signatures are required. A list of Global Custodian (GC) signatories can be provided in case of POA to GC. There is an exemption provided if SWIFT (Society for Worldwide Interbank Financial Telecommunications) is utilized as a mode of guidance.
Category II (medium risk jurisdiction)
At applicant level
- Constitutive documents like MoA, COI, prospectus, etc are required.
- Address proof like Power of Attorney (POA), mentioning the address is acceptable as address proof.
- Name, mobile number, email id, PAN and income range are required.
- Board resolution is required.
- FATCA (Foreign Account Tax Compliance Act)/CRS form is required.
- KYC Form/CAF is required.
Senior management
- List of directors as part of the KYC form is required.
Authorised signatories
- List and signatures are required. List of Global Custodian (GC) signatories can be provided in case of POA to GC. There is an exemption provided if SWIFT (Society for Worldwide Interbank Financial Telecommunications) is utilized as a mode of guidance.
Ultimate Beneficial Owner (UBO)
- List of UBO along with the details of intermediate BO is required.
- Proof of identity is required.
Category III (low risk jurisdiction)
At applicant level
- Constitutive documents like MoA, COI, prospectus, etc are required.
- For FPIs from non-high risk jurisdictions, a POA with the address is accepted as address evidence. FPIs from high-risk jurisdictions must produce address proof other than a POA.
- Name, mobile number, email id, PAN and income range are required.
- Board resolution is required.
- FATCA (Foreign Account Tax Compliance Act)/CRS form is required.
- KYC Form/CAF is required.
- Annual financial statement that has been audited or a certificate from an auditor certifying net worth is required.
Senior management
- List of directors as part of the KYC form is required.
- In the form, the entity must enter their full name, nationality, date of birth and address.
Authorised signatories
- List and signatures are required. There is an exemption provided if SWIFT (Society for Worldwide Interbank Financial Telecommunications) is utilised as a mode of guidance.
- Proof of identity with a photograph is required.
- Proof of address details on letterhead is required.
Ultimate beneficial owner (UBO)
- List of UBO along with the details of intermediate BO is required.
- Proof of identity with a photograph is required.
- Proof of address details on letterhead is required.
The above-mentioned KYC requirements are based on a SEBI notification.
Note:
- Other than the KYC criteria listed, each intermediary’s internal regulations may impose additional paperwork requirements for performing enhanced due diligence.
- FPIs must guarantee that exempted or relevant papers will be submitted to the intermediary if required by regulators.
- FPI Category I excluding those registered under Regulation 5(a)(i) and FPI Category II excluding those registered under Regulation 5(b)(i) must present KYC documents equivalent to each other.
- A local custodian can rely on KYC performed by another company of the same financial organization (such as a global custodian or investment manager) that is regulated and comes from a FATF member nation, where KYC is performed according to their home jurisdiction norms.
- In lieu of an official constitutional instrument, a prospectus and an information memo are permissible.
- The PAN of FPIs can be verified online at a website recognised by the Income-Tax Department.
- If there is no exchange of physically signed documents/ agreements between the local broker and the FPI or its relevant authority who is an investment manager regulated in a FATF member country, the board resolution and the authorised signatory list (ASL) are also not necessary.
- If the same entities are listed as FPIs, the existing risk-based KYC requirement that applies to FPIs should also apply to FDI securities accounts, FVCI/DR accounts, and FCCB accounts/entities.
- If all of the information requested in the KYC Form is submitted in the Form itself, no additional KYC Form will be required.
KYC paperwork is shared with banks in order for FPI’s to create a bank account
- On the basis of sufficient authorisation, intermediaries are encouraged to share essential KYC papers with the banks concerned.
- As a result, through their authorised representative, a set of hard copies of the appropriate KYC documents provided by FPIs to intermediaries may be forwarded to the concerned bank.
- Intermediaries must declare that the documents have been properly confirmed with the originals or that notarised documents have been obtained, if necessary, when transferring such documents. A proper record of document transfer, both at the level of the intermediaries and at the bank, under the signatures of officials of the transferor and transferee entities, may be kept in this respect.
Ultimate beneficial ownership
- Beneficial Owners (BOs) are natural individuals who eventually own or run an FPI and must be recognized in accordance with Rule 9 of the Prevention of Money-laundering Rules, 2005.
- FPI Category I is exempted from providing BO details.
- The materiality threshold for identification of BOs of FPIs on controlling ownership interest is :
1) 25% in case of company and
2) 15% in case of partnership firm, trust, an unincorporated association of individuals.
- For FPIs from “high-risk jurisdictions,” a lower materiality criterion of 10% for identifying BO and ensuring KYC paperwork as applicable for Category II FPIs may be used.
Periodic KYC review
KYC review refers to the procedures taken to guarantee that documentation, records, or information obtained as part of the due diligence process are kept up-to-date and accurate. When there is a variation in material information or disclosure, FPIs will be entitled to a KYC review. The KYC review should be based on FPI risk analysis.
| Jurisdiction | Category I | Category II | Category III |
| High risk | During the continuance of registration. | Annually. | Annually. |
| Low risk | During the continuance of registration. | During the continuance of registration. | Regulated FPI’s: During the continuance of registration Others: annually. |
In case of non-submission of KYC documents, on the applicable due date for KYC review, DDP /custodian/intermediary may send a notice to FPI instructing speedy fulfillment concerning KYC prerequisite and under no circumstances permit further purchase transactions to such clients after 60 days of the KYC review date.
Data security
KYC Registration Agencies (KRAs) must secure personal information submitted by beneficial owners, including SMOs or FPIs. Such information shall be made available to intermediates only on a “need to know” basis, via an authentication approach in which an intermediary can get the information from the KRA via authentication (similar to OTP) after the KRA receives confirmation from the FPI or its global custodian. This provision will be optional, and it will be disabled only if the FPI instructs KRA to do so.
Key features
- Up to 3 email ids of the FPI can be recorded with 1 obligatory id.
- Download Consent Flag – Yes (with consent) / No (without consent).
- Where the Download Consent Flag is “Yes”, an email with the consent link with the decision tab “Approve” or “Reject”, will be sent to the Authorised Representative of FPI, requesting their consent to provide the KYC records to the requesting intermediary.
- KRA will send an email to the requesting intermediary to empower them to follow up for the consent.
- KRA will allow the download of KYC records and information once the consent is received from the approved delegate of the FPI.
- Whenever KYC details of the client are modified by intermediaries, the KRA system sends unsolicited downloads of KYC information to all intermediaries who have either uploaded/downloaded/modified KYC information of the FPI.
- If an FPI closes an account with an intermediary, the FPI or the intermediary must notify KRA so that the FPI’s KYC may be delinked and unsolicited download requests can be stopped.
| NOTE: The custodian must keep the KYC records in their original form for a minimum of five years after the last transaction with the specified FPI. In the event that a lawsuit is pending, this data should be kept until the matter is resolved. |
Guidelines for KYC
- All copies of the applicant’s documents should be backed by originals for verification. If the original of a document is not available for verification, the copies should be properly verified by institutions that are authorised to do so.
- If any proof of identity or address is written in a foreign language, it must be translated into English.
- The applicant’s name and address on the form must match the documentation verification presented.
- Proof should be enclosed if more than one address is specified.
- If approved by the PoA, the global custodian or the local custodian may fill out the Form.
- A non-individual Client is not eligible for in-person verification. Individual clients will be able to use IPV via a web camera.
- While collecting documents/information for an FPI, intermediaries might depend on documents/information accessible from credible public sources in addition to information provided by the client. A fully authorized official of the Intermediary may certify these documents. Such documents do not require any additional authentication.
- Notary publics, officials of multinational foreign banks, and any bank regulated by the Reserve Bank of India are among those authorised to certify documents.
Conclusion
FPI’s play a vital role in the Indian market. It is important to make the norms investor-friendly to protect their rights without compromising the integrity of cross-border capital inflows. KYC norms help in streamlining the whole process. An investor needs to keep in mind the category he falls in before registering and has to research the documents required in that category.
References
- https://corporates.db.com/files/documents/namaste-India/Namaste_India_2020.pdf
- https://www.sebi.gov.in/sebi_data/commondocs/may-2019/Annexure-II_p.pdf
- https://www.moneycontrol.com/news/business/markets/sebi-to-align-kyc-norms-for-local-investorsfpi-regime-1298077.html
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