SEBI prescribes uniform guidelines to market intermediaries on identification of beneficial ownership

The Securities and Exchange Board of India (SEBI) in consultation with the government of India has formulated a uniform approach to be followed towards determination of beneficial ownership.

Accordingly, SEBI has directed all registered intermediaries to obtain sufficient information from their clients in order to identify and verify the identity of persons who beneficially own or control the securities account, as part of their client due diligence policy.

Where the client is a person other than an individual or trust, viz, company, partnership or unincorporated association/body of individuals, SEBI has directed the intermediary to obtain information on the identity of the natural person, who, whether acting alone or together, or through one or more juridical person, exercises control through ownership or who ultimately has a controlling ownership interest.

Controlling ownership interest means ownership of/entitlement to:

• More than 25 per cent of shares or capital or profits of the juridical person, where the juridical person is a company;
• More than 15 per cent of the capital or profits of the juridical person, where the juridical person is a partnership; or 
• More than 15 per cent of the property or capital or profits of the juridical person, where the juridical person is an unincorporated association or body of individuals.

In cases where there exists doubt as to whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, the identity of the natural person exercising control over the juridical person through other means.

Control through other means can be exercised through voting rights, agreement, arrangements or in any other manner:

• Where no natural person is identified, the identity of the relevant natural person who holds the position of senior managing official;
• Where the client is a trust, the intermediary shall identify the beneficial owners of the client and take reasonable measures to verify the identity of such persons, through the identity of the settler of the trust, the trustee, the protector, the beneficiaries with 15 per cent or more interest in the trust and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership. 
• Where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a majority-owned subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies. 

SEBI had, on 5 September 2012, issued detailed guidelines to intermediaries on dealing with foreign investors, viz, foreign institutional investors, sub accounts and qualified foreign investors.

In case of mutual funds the boards of the asset management companies and the trustees will monitor compliance of the guidelines while in case of other intermediaries, their board of directors will ensure compliance, SEBI said in its circular.

The new guidelines will come into force with immediate effect, SEBI said in a release.

The beneficial owner is the natural person or persons who ultimately own, control or influence a client and/or persons on whose behalf a transaction is being conducted, and includes a person who exercises ultimate effective control over a legal person or arrangement. 

SEBI has already prescribed uniform `Know Your Client (KYC) requirements for the securities markets.

Further, the Prevention of Money Laundering Rules, 2005 also require that every banking company, financial institution and intermediary, as the case may be, shall identify the beneficial owner and take all reasonable steps to verify his identity.