The Third SIT Report on Black Money had recommended that SEBI establishes a disclosure mechanism for subscribers of Offshore Derivative Instruments, to ensure that, the names of the ultimate beneficial owners or promoters/directors who controlled the entities which subscribed to ODIs were adequately disclosed. The SEBI (Foreign Portfolio Investors) Regulations, 2014 and the subsequent circulars created an enhanced regulatory regime. However, the SIT Report considered the same to be inadequate due to lack of sufficient information regarding the nature of the entities which were subscribing to ODIs.

SEBI, in its recent meeting, resolved to implement the recommendations of the SIT Report and issued a circular dated June 10, 2016 under the FPI Regulations, introducing Know Your Client norms for ODI subscribers to identify the ultimate beneficial owners of ODIs. Although the FPI Regulations required that the issuers of ODIs do KYC checks on the subscribers, SEBI noted that there was no uniformity in the processes adopted by FPIs. The circular requires ODI issuers to identify and verify the beneficial owners of the ODI subscriber. In case the entity is a company, names of all persons who own 25% or more has to be disclosed and in case of a partnership/trust/unincorporated body, names of persons owning more than 15% need to be disclosed. The circular prescribes a “look through principle”, which means the FPI will have to identify the beneficial owners of the material shareholder or interest holder of the ODI subscriber.

Further, the circular states that ODIs may be transferred only to persons to whom ODIs may be issued under Regulation 22(1) of the FPI Regulations read with SEBI’s circular of November 2014. The circular also requires that prior consent of the issuer will be necessary to transfer ODIs, unless the transferee has been pre-approved by the issuer. FPIs will have to maintain detailed transfer records of the ODIs, update their records every time the ODIs change hands and disclose the same in their monthly reports to SEBI.

The enhanced disclosure and KYC requirements for ODIs is a clear sign that SEBI prefers entities to directly invest in the Indian stock market by registering themselves as FPIs rather than come in through the ODI route.