SEBI in its board meeting dated May 19, 2015 took some key decisions including the following:
Offshore Derivative Instruments (ODIs)
Noting the concerns raised by the Special investigations Team with regard to identification of beneficial owners and transferability of ODIs, SEBI has decided to issue additional measures for the purpose of enhancing the transparency and control over the issuance of ODIs. The board has decided to mandate Indian Know Your Customer (KYC) norms upon issuers of ODIs who till date, followed KYC norms of their home jurisdictions or jurisdictions of holders of these instruments. Further, issuers will now identify and verify the beneficial owners in the subscriber entities, who hold in excess of 25% in case of companies and 15% in case of unincorporated entities.
Further, issuers will have to conduct KYC reviews at the time of on-boarding and subsequently, every three years for low risk, and every year for all other clients. Other obligations include, reporting all intermediate transfers that take place in a month (as opposed to recording end holders at the end of every month under the current regime) in the monthly report on ODIs, filing of suspicious transaction reports with the Financial Intelligence Unit, carrying out reconfirmation of ODI positions on a semi-annual basis and putting in place systems and carrying out periodical reviews and evaluation of controls, systems and procedures with respect to ODIs.
Notably, ODI subscribers will now have to seek prior permission of the original ODI issuer for further/onward issuance/transfer of ODIs. In light of the falling reliance on P-notes / ODIs in recent years due to relatively enabling direct investment norms, such measures are expected to raise the cost of issuance and holding of ODIs; making them less attractive, specially for the issuing entity. The law at times imposes regulatory burden on the issuing entity for something which it is able to enforce only by way of contract. If the end investor acts in violation of the law, it would only be in breach of the contract, which the issuing entity would possibly be hauled up for a regulatory violation.
Guidance Note on Settlement Proceedings
SEBI has decided to issue a guidance note clarifying whether violations relating to fraudulent and unfair trade practices may be settled under the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. These regulations were formulated primarily to settle minor and technical violations which do not have a wider impact on the market thereby allowing enforcement to concentrate on major and significant cases. Until now, based on a conservative approach, all violations involving fraudulent and unfair trade practices have been kept out of the purview of these regulations despite there being sufficient discretion under Regulation 5(2)(b). By way of the guidance note, SEBI is set to clarify that, based on the facts, circumstances and sufficiency of evidence, SEBI would permit the settlement of cases involving fraudulent and unfair trade practices which do not have a bearing on the securities market as whole even if they effect a particular listed security and its investors. This is a welcome move to somewhat widen the scope of consentable cases thereby reducing the enforcement workload of SEBI on more minor cases.