Sebi Plan to Build KYC Database of Beneficial Owners Irks FPIs

Large overseas fund managers such as Templeton, Fidelity and BlackRock have opposed the Securities and Exchange Board of India (Sebi) proposal to create a central database containing the personal information of all beneficial owners of offshore funds, said two people with direct knowledge of the matter. Such a database held by an external agency in India would violate the law in their home countries, they argue.

The issue pertains to disclosure of know-your-customer (KYC) information of beneficial owners (BOs). Sebi had issued a circular on April 10 last year asking foreign portfolio investors (FPIs) to identify the BO of a fund based on not just ownership but control as well. In cases where there is no significant BO based on economic ownership, fund managers and other senior management officials of the funds were to be considered BOs. All publicly pooled funds such as foreign mutual funds have no significant BO since they raise money from thousands of small unit holders. In such cases, the chief investment officers or other senior management officials become the BOs.

Stiff opposition from FPIs, especially non-resident Indians (NRIs), on this issue forced Sebi to water down the rule. The regulator restricted the new interpretation of beneficial ownership to KYC purposes. Under this, FPIs will have to submit KYC documents of beneficial owners to custodian banks, which in turn will share them with registrars.

Sensitive Issue for Investors

Sebi has asked registrars to create a centralised database of documents that can be accessed even by other market intermediaries provided they obtain consent from the FPIs. Sebi, Templeton, Fidelity and Blackrock did not respond to queries. The issue was brought up at several meetings of the Sebi-appointed HR Khan Committee on foreign portfolio investment. FPIs have suggested that, as an alternative, they will obtain all KYC and submit an affidavit to Sebi stating that they have done so and any details will be provided to the regulator when demanded. While the proposal was initially considered, it was eventually dropped because the regulator felt funds could use such exceptions to hide beneficial owners.

Some FPIs suggested Sebi should manage the data itself instead of asking third parties to do so. “Sebi is aware of these challenges and the HR Khan committee is exploring suitable solutions,” said Sriram Krishnan, head of securities services, Deutsche Bank. “We are confident that all the investor feedback in this regard will be suitably addressed soon.” Many offshore funds had opposed the proposal on the grounds that employee data cannot be saved outside the home country in accordance with the local law.

The issue is sensitive, especially to investors from Europe, where new data privacy laws such as the General Data Protection Regulation (GDPR) have come into effect. “Under GDPR, organisations cannot force their employees to share personal data with a third party,” said one of the persons cited above. “These funds will have to comply with their domestic laws as well.”

However, Sebi is unwilling to budge on the matter because FPIs have complied with such requirements in some other countries. “Some of the funds which are opposing Sebi's proposal now have previously complied with similar laws in countries like the US and Canada,” said one of the people cited above. Sebi has assured offshore funds that their data will be safe and it is planning stiff penalties against entities or individuals trying to access confidential information without the regulator’s approval. The regulator could also revoke the licence of such violators.

“Sebi shall have to work out measures which will convince FPIs that their data will be confidential and shall never be parted with,” said Neha Malviya, director of Wilson Financial Services, an FPI brokerage. In the past, regulators and companies have squabbled over data privacy and localisation. The Reserve Bank of India and the Telecom Regulatory Authority of India have also faced similar resistance in the past.

The Economic Times, 11th March 2019

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