FPIs: FPIs are reluctant to appoint senior executives from parent companies
One of the key disclosures is the identification of “beneficial owners”, which are typically major investors in the fund. However, when none of the investors have a large interest in the fund body, key individuals in the fund’s investment company are referred to as SMOs. These are people that Sebi, with whom all FPIs are registered, can contact if there are irregularities and compliance violations.
Most FPIs have multiple tiers that help pool funds, reach different markets, and save on taxes. Thus, an FPI traded on stock exchanges in India is typically a corporation incorporated in Singapore or Mauritius which issues a tax residency certificate to the fund vehicle established there. However, the Mauritius company may be owned by another vehicle in another tax haven such as Luxembourg or the Cayman Islands, which in turn is owned by a US parent company at the top of the three tier structure.
‘SMO should be a senior person handling FPI’
In preparing the regulatory disclosures, which are updated with changes in beneficial ownership, a first level officer or director of the intermediary vehicle – meaning Mauritius in the example above – is normally designated by FPI and its custodian as the SMO.
“Sebi now wants a senior person to be designated as an SMO in the final and final unit. In recent exchanges, the regulator has made it clear that it would like a fund to identify someone in the parent organization who would be responsible for serious omissions,” a senior industry expert told ET. “We think most funds are not happy with that. A manager of the parent company who is based in New York does not want to be arrested by Sebi because he may not run the fund regularly or be unaware of the rules here.” An SMO is designated by an FPI when there are no identifiable beneficial owners in the fund A term borrowed from the Anti-Money Laundering Act (PMLA), a beneficial owner of an FPI is the “ultimate individual” holding 25% or more of the fund pool The regulatory threshold for determining beneficial ownership is lower, at 15% instead of 25% where a fund investor is a partnership or trust and 10% where a fund is located in a “high risk” jurisdiction. The definition of a high risk center may vary from custodian to custodian. Such ownership information is disclosed on collected on the basis of self-declarations that fund managers give to the custodian banks, d which they in turn regularly report to Sebi.
Thus, when all investors in a fund (or shareholders in a corporation registered as an FPI) fall below the beneficial ownership identification threshold, the role of an SMO becomes more important from the regulator’s perspective. In most cases, FPIs refer to the names of senior persons in placement vehicles in Mauritius, Singapore or Luxembourg as SMOs.
“Custodians and fund advisors are unsure how to designate SMOs from parent organizations. Unlike beneficial ownership, where you can look from one vehicle to another to find out the actual people controlling the FPI, there is no concept of indirect SMO in the regulations. The intent is that the SMO should be a senior person handling the FPI, not the parent company,” said a senior advisor to several FPIs. According to market sources, custodians have been discussing the issue among themselves and in the regional trading Association Asia Securities Industry & Financial Markets Association may follow the matter with Sebi, among others. The Sebi spokesman could not be reached for comment.
A tighter regulatory stance follows US short seller Hindenburg’s claims that Adani companies’ share prices have been manipulated by select FPIs. After shares in Adani Group companies collapsed and the group’s flagship was forced to withdraw a large public offering, Sebi on February 3 asked all custodians to declare beneficial ownership of all FPIs by the end of September as they did on March 31. A week later, the regulator released a list of 10 entities with the custodians, with a request to check whether any of those entities were “investment managers,” “fund accountants,” or “portfolio managers” of the custodians’ FPI clients. Two of these units were named in the Hindenburg report.
https://economictimes.indiatimes.com/markets/stocks/news/fpis-shy-of-naming-senior-officers-of-parent-entities/articleshow/98075894.cms FPIs: FPIs are reluctant to appoint senior executives from parent companies