The Securities and Exchange Board of India (SEBI) issued a new circular on September 26, 2024, providing operational guidelines for Foreign Venture Capital Investors (FVCIs) and Designated Depository Participants (DDPs). These guidelines, set to take effect from January 1, 2025, align with the recent amendments made to the SEBI (Foreign Venture Capital Investors) Regulations, 2000, announced earlier this month. The purpose of the updated guidelines is to streamline the processes related to registration, compliance, and transition to the new regime for FVCIs.
Key Changes in the FVCI Regime
The amendments to the SEBI (FVCI) Regulations, 2000, introduce several updates affecting both new and existing FVCIs. One of the notable changes includes the transition to the amended FVCI regime, where FVCIs must register through a DDP rather than SEBI directly. This change simplifies compliance and enhances the regulatory framework to protect the integrity of Indian financial markets.
Key highlights of the circular include:
1. Registration of Foreign Venture Capital Investors
The registration process now involves the engagement of DDPs by both new and existing FVCIs. All FVCIs are required to engage a DDP by March 31, 2025, to facilitate the continuation of their registration. Failure to do so will prevent further investments, leading to the liquidation of their existing investments in listed and unlisted securities by March 31, 2026 and March 31, 2027, respectively.
FVCIs already registered must undergo due diligence by their DDPs to verify compliance with the updated eligibility criteria. If an FVCI is deemed ineligible, it will be prohibited from making new investments but may continue to hold or liquidate existing ones.
2. Compliance and Monitoring by DDPs
DDPs are responsible for monitoring FVCIs' compliance with SEBI's updated regulations. This includes ensuring that FVCIs and their underlying investors adhere to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) requirements, as specified by the Prevention of Money-Laundering Rules, 2005. FVCIs that fall short of the compliance criteria will be reported to SEBI, with all transactions in their accounts suspended.
3. KYC Requirements and Data Handling
A significant section of the circular emphasizes the Know Your Client (KYC) requirements for FVCIs, which include detailed documentation submissions for verification. DDPs are instructed to follow strict KYC norms, ensuring the accuracy and completeness of all information, including the identification of Beneficial Owners (BOs). The KYC documentation will be shared across relevant market intermediaries through the KYC Registration Agencies (KRAs).
4. Periodic Reviews and Renewals
Existing FVCIs must renew their registrations every five years. Those registered before December 31, 2019, must pay a renewal fee and update any relevant information before March 31, 2025. FVCIs that fail to comply with these renewal requirements will be subject to late fees and potentially forced liquidation of investments.
5. Data Security and Reporting Obligations
KRAs are mandated to ensure the security of personal information related to FVCIs, particularly data concerning their Beneficial Owners (BOs). Intermediaries can only access such information on a need-to-know basis, using secure authentication methods like One-Time Passwords (OTPs). The circular also details monthly reporting obligations for DDPs, including information on FVCI applications received, fees collected, and compliance reports.
Conclusion
SEBI's updated operational guidelines for FVCIs and DDPs mark a significant shift in how foreign investors interact with India's venture capital markets. By aligning with international best practices and enhancing transparency in investment processes, SEBI aims to foster greater investor confidence while maintaining robust regulatory oversight. The updated regime, which takes effect in January 2025, provides a clear framework for FVCIs to continue their investments in India, subject to compliance with the amended rules and regulations.
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