SEBI May Junk Plan To Identify High-Risk Countries For Foreign Investments 

The market regulator may do away with its plan to create a list of high-risk jurisdictions for foreign investments as custodians couldn't come up with common names, two people with direct knowledge of the matter told BloombergQuint.

While deciding on high-risk jurisdictions, custodians are typically guided by their global process and internal protocols. Any attempt to arrive at common names for India can compromise their global standards, the first of the two persons quoted above said requesting anonymity as the matter is still with the regulator.

“It would have been easier for the custodian banks if there was a clear direction from SEBI on which countries should be included in the high-risk country list. In its absence, all custodian banks will need to fall back on their global teams to update their existing list,” said Suresh Swamy, partner, financial services, at PwC. “It's possible that the risk perception of a country across banks may not be uniform. To that extent, coming up with a common list appears to be difficult.”

The Securities and Exchange Board of India has been trying to curb the possibility of round-tripping of funds to avoid tax by making know-your-customer norms stricter for foreign investors. The regulator's crackdown has already killed participatory notes—offshore derivatives used by overseas investors to trade without registering in India.

SEBI on April 10 issued a circular stating that if more than 10 percent of the flows in a fund are coming from a so-called high-risk jurisdiction, then such investments will be subjected to enhanced ultimate beneficiary ownership and rigorous Know Your Customer norms. In July, five major custodians in all picked 25 countries—of the 56 from which India receives flows—as high-risk jurisdictions.

The list of countries are:

• China
• U.A.E.
• Cyprus
• Mauritius
• Bahamas
• Bahrain
• Bermuda
• British Virgin Islands
• Cayman
• Channel Islands
• Cook Islands
• Guernsey
• Indonesia
• Isle of Man
• Jersey
• Kuwait
• Liechtenstein
• Malaysia
• Oman
• Philippines
• Russia
• Saudi Arabia
• Thailand
• Trinidad and Tobago
• Turkey

The regulator, however, decided to not to issue a final list as it can have diplomatic repercussions, the second person quoted earlier said. The plan seems to have been done away with because of lack of a SEBI directive and custodians failing to come to a common ground, the person reiterated.

BloombergQuint's emailed queries to SEBI were not immediately answered.

The plan to identify high-risk jurisdictions led countries to write to the regulator for clarifications. Financial Services Commission of Mauritius met the regulator for assurances that it's not put on the list, according to a July 20 report of the Economic Times.

Foreign portfolio investing route is widely used by the overseas investors due to several reasons, including Mauritius's well-regulated ecosystem, ease of doing business, clear laws and availability of services, said Faraz Rojid, head of financial services at the Economic Development Board of Mauritius. “Mauritius has constantly and consistently implemented significant initiatives to enhance its legal and regulatory frameworks for exchange of information and transparency as per the international norms and standards to combat money laundering and terrorist financing.”

SEBI has now formed a panel under the chairmanship of HR Khan, former deputy governor of the Reserve Bank of India, to examine ways to ease regulations for foreign portfolio investors, according to a circular issued on Aug. 21. The committee met today and will submit suggestions next week, the second person quoted earlier said.

The NRI Debate

According to SEBI regulations, non-resident Indians or persons of Indian origin and overseas citizens of India can't be “beneficial owners” or “in control” of foreign portfolio investors.

That has created difficulties for several foreign portfolio investors who have an NRI or an overseas citizen of India acting as a senior managing official or a key fund manager, according to Tejesh Chitlangi, Senior Partner, IC Universal Legal. “It would be prudent if the aforesaid prohibition is relaxed.”

The Khan panel may recommend that NRIs, persons of Indian origin and overseas citizen of India fund managers are exempted from the restrictions, the people quoted earlier said.