India: Revised KYC And Eligibility Framework For FPIs: SEBI Waters Down The April 10 Circular

With the FPIs on tenterhooks since the issuance of the now famous, or rather infamous, circular dated 10 April 2018 (April 10 Circular), following the submission of the report1 by the working group under the Chairmanship of Shri H R Khan (Working Group) and in-principle acceptance of their recommendations by the SEBI Board, SEBI has finally issued two important circulars on 21 September 2018.  Vide the two separate circulars, one dealing with Know Your Client (KYC) requirements and the second with the eligibility conditions for Foreign Portfolio Investors (FPIs), SEBI has substantially superseded their earlier April 10 Circular and has provided the much-needed relief and clarity for the FPI community.

Broadly speaking, the revised circulars have accepted the fact which was highlighted by the Working Group that the beneficial ownership (BO) criteria laid down in Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (PMLA Rules) should be used only for KYC reasons and not for determination of eligibility of the FPIs. The salient features of the revised KYC requirements, conditions regarding clubbing of investments and eligibility conditions of FPIs are analysed in Part I and Part II of this Ergo, respectively.


On 21 September 2018, the SEBI vide a circular titled 'Know Your Client requirements for FPIs' numbered CIR/IMD/FPIC/CIR/2018/131 (FPI Circular 1) superseded the directions on 'Know Your Client requirements for FPIs' contained in the April 10 Circular.

The FPI Circular 1 has broadly incorporated all the recommendations proposed by the Working Group on identification and verification of BO of FPIs. The important highlights of the FPI Circular 1 in relation to identification and verification of BO are as follows:

  • FPIs need to maintain the list of BO in a prescribed form and share the same with the designated depository participants.
  • It has clarified that in case of FPIs organised in the form of limited partnerships, the BO shall be identified both on the basis of entitlement as well as control.
  • It has retained the concept of identification of BO based on PMLA Rules and applicability of materiality thresholds on look through principle, however, it has clarified that disclosure in relation to intermediate holding structures together with their respective BO would have to be disclosed.
  • It has also clearly laid out that the exemption under Rule 9(3)(f) of PMLA Rules for listed companies will not be available for foreign companies thereby requiring even the listed foreign entities to identify their BO.
  • The FPI Circular 1 has further clarified that the BO declaration will be applicable to offshore derivative instruments issuing FPIs
  • Category I FPIs, including entities in a chain of structure which is eligible to register as a Cat I FPI, are exempt from identification and verification of BO
  • The FPI Circular 1 has stressed on the fact that in case of companies / trusts represented by service providers, if the BO exercises controls through means like voting rights, agreements, arrangements etc. then the real BO should be identified, and it should not be a nominee of another person
  • Senior managing official (SMO) can be any individual as designated by the FPI but should hold a senior management position and shall make key decisions relating to the FPI

The much-needed clarity for non-compliance of the stipulated KYC norms for FPIs has been brought out by the FPI Circular 1. It has accepted the recommendations proposed by the Working Group with respect to non-compliant FPIs by allowing them a period of up to 6 months from the date of the FPI Circular 1 to comply with the revised KYC norms, which we believe should provide them enough time for transition.

Handling of personal KYC data and data security: With respect to the concerns surrounding security of personal information of BOs, the FPI Circular 1 has proposed security provisions which includes setting up of KYC Registration Agencies (KRA) who shall lock the BO information provided by the FPIs and would provide the information to intermediaries only on 'need to know basis'. The time-period stated in the FPI Circular 1 for maintenance of records by custodians is minimum of 5 years from the date of cessation of the transactions with the said FPI and in cases where a litigation is pending, these records must be maintained till the completion of the proceedings.


The revision of BO requirements made by FPI Circular 1 is a welcome step as it has brought relief to the industry participants by categorically clarifying that the BO declaration will not impact the eligibility conditions of FPIs. It has also provided much needed clarity with respect to applicability of BO requirements. It has excluded Category I FPIs from identification and verification of BOs which we believe is an informed step as all the Category I FPIs are either government / government related entities and are perceived to be low risk entities.

It would be interesting to see how the data security provisions laid down by the FPI Circular 1 would be received by the offshore investors as the risk pertaining to data breach may still linger because the information will still have to be shared with a third party (KRA).

However, the exception carved out for listed entities by the Working Group has not been incorporated in the FPI Circular 1. While the concerns of SEBI around the quality of listings are understandable, this could pose practical challenges for some overseas listed entities especially where the threshold for BO is reduced to 10%.

Part 2: Eligibility conditions for FPIs

SEBI vide circular titled 'Eligibility Conditions for Foreign Portfolio Investors' numbered CIR/IMD/FPIC/CIR/P/2018/132 (FPI Circular 2), has superseded the previous circular dated 10 April 2018 to the extent that the eligibility conditions for FPIs having Non-Resident Indians (NRI), Overseas Citizen of India (OCI) and Resident Indians (RI) as constituents are no longer linked to the BO criteria laid down under PMLA Rules. The key highlights of the said circular are as follows:

  • No restriction on FPIs from having NRIs/OCIs/RIs as investors provided their individual holding is capped below 25% of the corpus of FPI and aggregate holding should be below 50%
  • The FPI Circular 2 in fact has clarified that RIs are permitted to invest in FPIs as long as such investment is made through the Liberalized Remittance Scheme (LRS) of the RBI, however, the fund has to be a global fund where exposure to Indian securities is less than 50%
  • Though the FPI Circular 2 continues to stick to the fact that NRIs/OCIs/RIs cannot be in 'control' of the FPIs as a basic eligibility condition. However, an exception has been made for FPIs which are controlled by investment managers who in turn are directly or indirectly owned/controlled/owned by NRI/OCI/RI, provided such investment manager entities are either: (a) appropriately regulated in its home jurisdiction and registers itself with SEBI as non-investing FPI; or (b) appropriately registered with SEBI if incorporated under Indian laws. Further, an exception on control by NRI/OCI/RI has also been created for 'offshore funds' in respect of which 'no-objection certificate' has been procured from SEBI in terms of the SEBI (Mutual Funds) Regulations, 1996.
  • Further, FPIs which are exclusively investing in mutual funds in India will not be subject to any restriction on NRI/OCI/RI participation both in terms of individual ownership as well aggregate ownership.
  • The FPI Circular 2 has provided a two-year period to the FPIs to comply with these requirements which period shall commence from the later of (a) the date on which the FPI Regulations are amended to implement the provisions of the FPI Circular 2; or (b) the date of registration of the FPI, whichever is later. A provision has also been made for temporary breaches by an FPI of the above eligibility requirements wherein a cure period of 90 days as proposed by the Working Group has been accepted by the FPI Circular 2.


While the aggregate cap of 50% on NRI/OCI participation in FPIs will put constraints on certain genre of funds primarily targeting this investor base, it appears that for now the industry will have to learn to live with these constraints. We do hope that government would at some point consider relaxing the aggregate cap of 50% for at least certain categories of institutional investors. Alternatively, the industry needs to wait till the recommendation of the Work Group to merge FPI and PIS regime takes shape in which case these restrictions may fall away.

The FPI Circular 2 has accepted the recommendation proposed by the Working Group to specifically exclude the PIOs from the application of BO norms altogether which is a prudent step. However, PIOs with OCI card could still find the restrictions constraining as they will have to choose between the flexibility to freely invest in India vs. preserving their status as an 'Overseas Citizen of India', which might not be the best strategic choice to make. May be the answer lies in the recommendation of the Working Group on evaluating the merger of the PIS and the FPI route.

The revised requirements brought by the FPI Circular 2 should broadly deal with the anxiety of the NRI/OCI/RI fund managers who had seen the April 10 Circular as a major blow. The proposed set of eligibility conditions in a general sense should lead to 'business as usual' for most of the NRI/PIO owned fund managers subject of course with the additional administrative burden of getting the manager entities registered with SEBI as a non-investing FPI. Though not a perfect solution from an industry perspective, it appears to be fairly balanced between the expectations of the industry as well as the regulators.


1. Please refer to our ERGO titled 'SOME BREATHER FOR FPIs: Hits and Misses of the SEBI Committee Report' dated 14 September 2018, for more details.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions