New regulations to impact Cayman funds in India

The Securities and Exchange Board of India (Sebi) announced a new rule under which only certain types of foreign portfolio investors will be allowed to deal in participatory notes, a form of derivative based on Indian stocks, futures and options.

The new regulations limit the issuance of or subscription to participatory notes to category-I funds. These include sovereign wealth, pension and endowment funds, as well as funds from Financial Action Task Force member countries.

Indian business media reported the move would affect many funds from the Cayman Islands and Mauritius, because these jurisdictions are not direct members of the FATF, but only of regional affiliates of the standard-setting body in anti-money laundering.

Funds from Cayman and Mauritius account for 15% to 20% of portfolio investments in India.

India’s Economic Times reported in September last year that funds coming from non-FATF countries will have to meet stricter disclosure standards and face greater scrutiny and regulatory hurdles, following a review of the country’s foreign portfolio investor regime.

The review recommended, among other things, to reduce the number of categories of foreign portfolio investors from three to two and to simplify the registration process and know-your-client documentation requirements. The recommendations have been approved by the Sebi board, but details have yet to be published.

Sebi’s soon-to-be-released operating guidelines are expected to specify if there are any other restrictions for funds from non-FATF countries.

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