BCI rules do not permit advertisement or solicitation by advocates or their firms. This website is for information only. See Disclaimer

SEBI asks for investor profiles from AIFs as inter-departmental sharing gains ground

Featured in

Trustees will need to invest significant amount of resources towards this, according to lawyers

Trustees have been asked to file more granular details of fund participants including percentage of high-risk individual clients. Representative image

The market regulator has asked trustees of alternative investment funds (AIFs) to share more information about fund participants, with concerns mounting around moneylaundering and round tripping.

This is part of a larger exercise by the Securities and Exchange Board of India (SEBI) to “to figure out how the country is being funded and, more importantly, who is in control of the money”, according to Yashojit Mitra, partner at Economic Laws Practice. He added that this will also help when the government is trying to stop or manage the flow from funds from certain geographical locations.

Follow live market updates and analysis here

“SEBI wishes to ascertain the potential risk of these funds to the Indian financial system,” said Sumit Agrawal, a financial regulator lawyer and founder of Regstreet Law Advisors. Various categories of AIFs may be required to different types of information based on the risks they pose, he added.

With this move for higher transparency, the market regulator is also trying to put the onus on trustees to ensure the sources of funds are legitimate, according to Mitra.

Past loopholes

There have been cases where AIFs have been used by clients who otherwise are prohibited from trading in securities market, said Agrawal. “In a case relating to a film fund and in another case of art fund, SEBI (Securities and Exchange Board of India) had received numerous complaints,” he said.

This April, Vistaar Capital Advisors was asked by SEBI to wind up its film fund in six months and provide exit to its investors/unit holders, after the fund failed to wind up after expiry of its tenure in 2013. While details of this particular art fund are not known, in earlier instances, SEBI has asked art funds to close down when the funds try to function without registering with SEBI under the Collective Investment Scheme (CIS) and didn’t return money to the investors. A CIS is not an AIF, in that it can invite public participation while an AIF needs to source its funds through private invitations.

Trustees have been asked to file more granular details of fund participants including percentage of high-risk individual clients, of high-risk legal entity clients, of clients from grey-list countries of Financial Action Task Force (FATF) Public statement and the UN Security Council (UNSC) list, and of clients against whom any regulatory order has been passed or action has been taken.

This data from regulated entities is to be shared by all regulators for mutual evaluation by FATF compliant countries, according to sources.

AIF trutees have also been asked to provide more information on intermediaries, such as if they are providing cross-border services and the percentage of transactions done digitally; and to provide information on the training given to AIF employees in Anti-Money Laundering (ATM) and Combating the Financing of Terrorism (CFT).

These details can help in the inter-departmental sharing of information—among income-tax, banking and market regulators, and Financial Intelligence Unit – India (FIU-India) – that has already started, according to insiders. For example, if a person’s income-tax statement does not reflect the proceeds he or she receives as an ultimate beneficial owner (UBO) of an FPI, then the IT department can be immediately alerted to it. SEBI has set September 2023 as a deadline for FPIs to divulge their UBOs.

Trustees’ obligations

Trustees may have to invest significant effort and resources to track this information, according to Regstreet’s Agrawal. Penalties for failure to comply could include fines, suspension of registration, or other regulatory action, with the severity of the penalty depending on the nature and extent of the non-compliance, he added.

“To ensure compliance with all applicable regulations and guidelines, AIF trustees should establish clear reporting protocols, conduct regular internal audits, and seek legal and regulatory advice as necessary… They should also stay up-to-date on regulatory developments and best practices in the AIF sector,” said Agrawal.

“Clearly, the cost of non-compliance ought to be heavier than compliance if SEBI is serious about streamlining the underenforced sector,” he added.