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Issues in the Opening of Demat Accounts by Foreign Investors

    5 August , 2020         Fdiindia

Issues in the Opening of Demat Accounts by Foreign Investors

The FDI deals might face issues in the last leg of its finalization as the foreign investors facing difficulty in the opening of a Demat account. 

In the finalizations of an FDI deal, it is important that the foreign investor opens a Demat account with the custodian bank through which it will be holding the shares of the company that they wish to invest in. 

For the opening of the Demat account, self-certified documents by authorized signatories, notarization of a certain power of attorney papers, and verification of copies with the original documents is required. 

The foreign portfolio investors were given relaxation in the documentation process due to the national lockdown due to the pandemic by the Securities & Exchange Board of India. The relaxation was given by allowing the scanned certificates to be accepted by email communication. In the case of proceeding of the FDI deals no flexibility was given by SEBI.

The Indian capital market regulator has been notified about the issues that are being faced in the opening of the Demat accounts that might be the cause of the delay in the finalization of the FDI deals in the present time. 

"Many countries are still witnessing partial or total lockdown and people are not able to attend office. In order to ensure that FDI can happen smoothly, it would be useful if foreign investors are allowed to submit scanned copies of documents for opening Demat accounts similar to the relaxation announced by SEBI for FPIs. The original documents can be collected later within a specified date" said Rajesh H Gandhi, partner, Deloitte Haskins & Sells.

"FDI as an investment route enables acquisitions of controlling rights and shareholding depending on the sectoral conditions and hence has always been subject to a more restrictive regime. FPI on the other hand only enables financial investment up to 10% for every investor or group. This probably explains why regulators may be taking a more cautious approach before providing any relaxation", said Moin Ladha, partner at law firm Khaitan & Co. 

In the earlier method of FDI deal, the funds that were transferred by the foreign investor used to get deposited in the suspense account of the custodian bank that holds the Demat account. Then the foreign investor does not have to open a new bank account. After the deal is done, the funds were transferred to the investee company (the seller) and stocks were credited to the Demat account. 

Suggestions have been made for the relaxation of the Demat account opening regulations for FPI eligible FDI entities. The registration process of FPIs is that they have to comply with the strict KYC procedure to get their registration with SEBI. 

On the basis of their internal compliance guidance, few of the banks have given relaxation of FPI rules to open Demat account for the FDI transactions that are based on their internal compliance guidance. 

Shagoofa Rashid Khan, partner, Cyril Amarchand Mangaldas said, "The industry was awaiting operational guidelines such as the format of reporting and disclosures to be made, Due to no standardized approach, buyers and sellers end up doing the best judgment assessment themselves on what constitutes adequate and appropriate disclosures, and thereby rely on undertakings and contractual indemnities to protect themselves from penalties if it is later discovered that the basis for proceeding with the deal without approval was incorrect."

Banks are making their own judgments in the interpretation of the Press Note 3 as there is no clarity. Some banking institutions are judging that only the China-linked investors will be having beneficial ownership of more than 25% in the overseas investor, the FPI proposal will require government approval. Other banks are fixing a threshold of 10% or 15%. 

There are speculations that the government will be defining the threshold for beneficial ownership and will be fixing it to 10%. 

There were no plans to come out with restrictions on FPI inflows as said on a conference call with the regional trade body Asia Securities Industry & Financial Markets Association, Anand Mohan Bajaj, joint secretary, department of economic affairs. 

"The interactions with Bajaj took place before the recent India-China standoff. Restricting and monitoring underlying investors in FPIs is very difficult, but we are keeping our fingers crossed" said a securities market expert.