Banks look for a way out of UBO tangle

Banks handling foreign direct investments (FDI) into local companies and overseas direct investments (ODI) by Indian investors venturing abroad, vet the last natural persons behind the larger shareholders of the investing entities.

But, in several cases they are unable to peel off the layers to spot the real persons at the peak of what could be a multi-layered investment structure – primarily due to less demanding disclosure requirements in several jurisdictions.

“There are instances where banks have been questioned for not identifying the ultimate beneficial owners (or, UBOs) of some investors. Banks are helpless in such cases as many countries don’t ask for detailed ownership information from investors. This was recently discussed among senior bankers. Many think our anti-money laundering laws should provide for different disclosure standards in other countries,” a senior banker told ET.According to India’s anti-money laundering regulations, the identities of the last natural persons behind every shareholder with 10% or more equity stake in the investing entity must be revealed. If the investor is a private equity fund, then such minute details are given on investors who contribute 10% or more to the fund corpus. If multiple investors belonging to an overseas group collectively hold at least 10%, then each group investor must share their respective UBOs. And, if a shareholder is from China or any country sharing a land border with India, the UBO details, down to the last person, are shared even if it holds less than 10%.

“Inconsistency does exist globally on the approach and documents required to determine UBOs. This creates more complexities when other restrictions under FDI rules apply. For instance, Press Note 3 restrictions for investment from bordering nations and restrictions for investment in non-banking finance companies (NBFCs) from non-FATF compliant investors,” said Moin Ladha, partner at the law firm Khaitan & Co.

FATF, or the Financial Action Task Force, is a global body that fights money laundering and terror financing. An investor from an FATF grey list would not be allowed to hold 20% or more in a local finance entity.

“Non-determination of a natural person results in the senior managing official to be determined as the BO. While the above test is clearly prescribed under applicable Indian laws to determine the BO of the investing entity, the same may clash with the local laws of the foreign investor which may have thresholds and criteria different from what is prescribed here. In such an eventuality, the onus should be on the foreign investing entity to contractually seek requisite KYC information from its concerned investor(s) and provide them to the banks and the investee entity in India as failing which the Indian parties may be construed as non-compliant with the applicable Indian laws which currently don’t provide enough flexibility to adapt to any conflict of laws scenario,” said Tejesh Chitlangi, joint managing partner of IC Universal Legal.

Authorised dealer banks processing the FDI transactions think they cannot be blamed if the granular data is not available in certain cases. These banks, it’s learnt, would hold another round of discussion on the subject before taking it up with the RBI or other authorities.

ODI: Clubbing Managers with Family
Interestingly, for ODI in the US, investing entities from India are required (under US regulations) to add the names of top company officials along with the promoters in the list of UBOs. This is primarily because senior officials often wield significant control in US companies where founders’ stakes are not as high as that of promoters’ in Indian companies.

“But this does not go down well with Indian promoters who do not want to club the names of employees, no matter how senior, with members of the promoter family and recognise them as UBOs,” said a senior tax practitioner.

The regulatory obsession with UBOs in FDI deepened amid fears of the Chinese buying into Indian firms while a string of rules from capital market regulator Securities and Exchange Board of India (Sebi) seeking investor detailed ownership information in FPIs followed allegations of price manipulation and breach of promoter shareholding in Adani group companies. The UBO rules, framed by Sebi for FPIs (and still evolving), are more detailed in nature.