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The 2018 FPI Saga: Entry of ‘Look Through’ mechanism and exit of Non-Resident Fund managers?

Two SEBI circulars dated April 10, 2018, shook up the Foreign Portfolio Investment segment. Terms of the circulars explicitly bar Non-Resident Indians (“NRI”) and Persons of Indian Origin (“PIO”) from ‘holding a controlling interest’ or from managing Foreign Portfolio Investment, consequently, affecting a large number of Fund Managers and other Investors falling under these categories. Further, this Circular expanded determination of the Beneficial Ownership (“BO”) by way of ‘Look Through’ mechanism, causing more debates and discussions.

After receiving inputs and comments from industry members, SEBI has halted the implementation of the controversial Circulars and in this regard, it has extended the time granted for compliance with the said circular up to December 31, 2018. On September 08, 2018 the Working Group under the Chairmanship of H.R. Khan (Retired Deputy Governor, Reserve Bank of India) vide its Interim Report[1] addressed[2] comments and concerns in response to the April 10, 2018 circular.

The Beneficial Ownership Controversy, Solved?

Under the extant Foreign Portfolio Investor (“FPI”) Norms[3], an FPI or an investor group can invest in not more than ten per cent of paid-up capital of each Indian company. The Securities and Exchange Board of India (“SEBI”) on April 10, 2018, issued the Circular and a further Clarification[4] on clubbing of investment limits. The Circular expanded the scope of Beneficial Ownership which stems from Regulation 23(3) of FPI Regulations. BO is where the same set of beneficial owners are constituents of two or more FPIs and beneficial investor(s) have common beneficial ownership of more than 50% in such FPIs. Further, as a rule, all FPIs having common beneficial ownership are treated as a single investor group, consequently attracting the limit of ten per cent as a whole.

Prior to this Circular Beneficial ownership was determined by materiality mechanism, whereby controlling ownership interest was primary and the only criteria. However, the April 10, 2018 Circular requires the determination of such BO in accordance of Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (“PMLA Rules”). This has introduced the ‘Look Through’ mechanism, however, this has to be resorted to only after exhausting the materiality test. Hence, the first test to be applied to determine a beneficial owner remains vide the materiality threshold which remains the same under the PLMA Rules, i.e. 25% in case of a company and 15% in case of partnership firm, trust and an unincorporated association of persons thereby. Only where no material shareholder/ entity is identified in FPI, the look-through mechanism is to be adopted on the basis of ‘controlling ownership’ basis. This bestows the status of UBO on any natural person(s) who ultimately owns or controls an FPI. If even then, no such determination is possible, the senior management of FPI is deemed to be in ultimate control.

In this regard, Working Group Report avers that the rationale behind the BO Criteria under PMLA was intended to be made applicable only for the purpose of KYC and not to be used to gauge eligibility of FPI and suggested SEBI to issue a Circular in this regard.

Before the controversial circular, all Category I FPIs were exempted from submitting BO list, proof of identity and address document for SMO, authorized signatories and BOs. The Circular laid down separate but lower threshold (10%) for identification of BO for an FPI coming from a ‘high-risk jurisdiction’ and it did not exempt Category I FPIs from this requirement causing debates and discussions since Category I FPI are either Government or Government related entities. In this regard, the Report suggested exemption of Category I FPIs from providing additional KYC document applicable to Category III FPI including BO declaration.

The Report has also clarified that Clubbing of Investment limit for FPI may be on the basis of common ownership, i.e. all entities having direct or indirect common shareholding/ beneficial interest of more than 50% OR based on common control. It has even suggested the exclusion of appropriately regulated retail funds, funds with majority-owned by public retail funds on a look-through basis and public retail funds with appropriately regulated Investment Managers.

Non-Resident Indians and Persons of Indian Origin stay but OCIs exit

SEBI vide it's Circular dated April 10, 2018, barred NRIs and PIOs from holding Ultimate Beneficial Ownership (“UBO”).[5] The FPI norms adopt the definition of NRI as provided in the Income Tax Act, 1961, which is broader than the typical exchange control laws and includes PIOs and persons not ordinarily resident in India. The Report after considering the definition of NRI laid down in FEMA20 suggested that PIOs (without OCI) status should be excluded from the applicability of the April 10 Circular restrictions while that OCI would not gain any such exemption.

The working committee has suggested new permissible thresholds for SEBI to consider for NRIs/OCIs. and Resident Indians i.e. single holding of 25% of the Assets Under Management (“AUM”) in the FPI and the aggregate holding of below 50% of AUM in the FPI. A much-awaited rider was suggested by the working committee in light of barring of NRI/OCI/RI from holding control of an FPI. It was suggested that NRI/OCI/RI can hold the position of Investment manager (“IM”) so long as firstly, IM entity of FPI is appropriately regulated in its home jurisdiction and registers itself with SEBI as non-investing FPI, secondly, the IM is incorporated/setup under Indian laws and appropriately registered with SEBI or thirdly, the FPI is offshore funds as approved by SEBI.


The circulars may have been enacted with an aim to tackle money laundering and round-tripping, however, the effects of such enactment shook the entire FPI Industry and could have had severe effects on investment inflows. Non-Resident Indians comprise a giant segment of Fund managers and barring them from controlling and managing portfolios would have weighed down heavily on Foreign Portfolio Investment as an investment avenue. The H.R. Khan Committee Report was much awaited among investors and investees alike with a hope that industry suggestions and public comments are appropriately addressed. It has indeed addressed various controversies and has provided interim relief amongst fund managers, especially those falling under the class of NRIs and PIOs. A SEBI Circular adopting these suggestions meticulously is awaited.

It is worth noting that the Report gave forth the definition of SMO, the absence of which led to confusing lacunae in the market. It has been defined as:

“The term senior managing official (SMO) means an individual as designated by the FPI who holds a senior management position and makes key decisions relating to the FPI.” It further recommended that there should be no restriction on NRI/OCI/ RI to be the SMO of a FPI.”

It has also put forth a suggested definition of Control to include:

“the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”

SEBI on September 21, 2018, issued a Circular[6] adopting the HR Khan Committee recommendations and has granted time till March 21, 2019, for compliance to these new KYC Norms. Vide another Circular[7] establishing eligibility conditions for FPI, it laid down that NRIs/OCIs and RIs are allowed to be constituents of FPI subject to the maximum contribution to the corpus of FPI by NRI/OCI/RI including those of NRI/OCI/RI controlled investment manager be below a 25% threshold from a single NRI/OCI/RI and below 50% in aggregate. It clarified that a RI’s contribution is one permitted under the Liberalized Remittance Scheme approved by RBI in global funds with Indian exposure not exceeding 50%.

SEBI has declared that an NRI/OCI/RI cannot be in control of FPI but FPI can be controlled by Investment managers controlled or owned by NRI/OCI/RI subject to the Investment manager being appropriately regulated in home jurisdiction and registered with SEBI as non-investing FPI and being incorporated or set up under Indian laws and registered with SEBI. In this regard, a two year period is given for becoming eligible.

With this, SEBI has for better or not, cleared the air of the confusion surrounding the above issues.


[1] Interim report on KYC requirements for FPIs submitted by the Working Group under H.R. Khan dated September 08, 2018.

[2] SEBI Circular No. IMD/FPIC/CIR/P/2018/124 dated August 21, 2018: Amendment to SEBI Circular No. CIR/IMD/FPIC/CIR/P/2018/64 dated April 10, 2018 on Know Your Client Requirements for Foreign Portfolio Investors (FPIs)

[3] The SEBI (Foreign Portfolio Investors) Regulations, 2014.

[4] SEBI Circular No. SEBI/HO/IMD/FPIC/CIR/P/2018/66 dated April 10, 2018: Clarification on clubbing of investment limits of foreign Government/ foreign Government related entities.

[5] SEBI Circular No. CIR/IMD/FPIC/CIR/P/2018/64 dated April 10, 2018: Know Your Client Requirements for Foreign Portfolio Investors (FPIs)

[6] Circular No. CIR/IMD/FPIC/CIR/P/2018/131 dated September 21, 2018: Know Your Client Requirements for Foreign Portfolio Investors (FPIs)

[7] Circular No. CIR/IMD/FPIC/CIR/P/2018/132 dated September 21, 2018: Eligibility conditions for Foreign Portfolio Investors (FPIs)

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