Cite legal hurdles and challenges in implementing the circular in its present form
The diktat requires custodians to collect and report information on ODIs, DRs held by FPIs. Representational image
The Asia Securities Industry and Financial Markets Association (Asifma), a lobby group for foreign portfolio investors (FPIs), has asked the Securities and Exchange Board of India (Sebi) to postpone the diktat on monitoring foreign holding in depository receipts (DRs) by a further three months, citing legal hurdles and challenges in implementing the circular in its present form.
The new norms, which became applicable on April 1 after being postponed by a month, require designated depository participants or custodians to collect, monitor and report information every month on offshore derivatives instruments (ODIs) and DRs held by FPIs and those foreign entities which belong to the investor group of the FPIs.
The industry body has said that investors in the US, UK and the European Union are in the process of obtaining legal advice on the circular. It has sought an interaction with Sebi, considering the numerous challenges involved in implementing the circular in its present form.
Asifma has told Sebi that it is engaging external counsel to seek advice as to the basis of the legal and regulatory authority on which the data relating to holdings in DRs and ODIs outside India can be obtained as well as the legal and regulatory aspects to be considered while collating the required information.
“The detailed work of aggregating data across multiple legal entities in a new way is operationally challenging and work on scoping and resourcing this is in early stages, and dependent on the legal advice and dialogue with Sebi,” the recent letter to Sebi said.
In an earlier letter, Asifma had pointed out that a similar structure for reporting ODIs and DRs was not applicable in any other jurisdiction and the association was not aware of any publicly available DR holdings data that could be connected to institutional reference data systems.
It had also pointed to concerns on data security. “The information that is sought from investors is highly sensitive and it would present significant data security regulatory challenges to share such information over email. Cyber security threats, particularly when data is transferred between market participants, are heightened and require greater encryption,” it had said.
Separately, custodians have also highlighted confidentiality concerns while disclosing information to custodians through nodal FPIs, especially when there is no account based relationship between the FPIs part of the investor group and the custodian.
To get around this problem, custodians want the depositories to develop a centralised web portal to facilitate the nodal FPI or FPI to report the underlying Indian security represented by the ODI or DR directly to the depository.
Custodians have pointed out that at present the depository accounts are opened in the name of registered FPIs and securities are safe kept in that account. For such FPIs, custodians do not maintain the record of the underlying Indian security represented by the ODI or DR. Also, the custodians do not maintain accounts for the FPI group entities who maintain accounts with other custodians or hold only ODIs or DRs offshore.
The custodians have said it will not be possible to differentiatebetween the actual overseas instrument representing the ODI or DR while recording the position of the underlying Indian security representing the ODI or DR. This is because one underlying Indian security with the same International Securities Identification Number can be held by a foreign entity as an ODI subscriber as well as DR holder.