SEBI’s Updated FVCI Guidelines: Strengthening Investor Protection And Compliance

Introduction

The Securities and Exchange Board of India (SEBI) amended the Foreign Venture Capital Investors (FVCI) Regulations recently in September 2024. These changes come into effect on January 1st, 2025, and introduce a new system for FVCI registration through Designated Depository Participants (DDPs). The guidelines cover topics such as registration procedures, eligibility requirements, and registration renewal. This circular aims to protect investors and regulate the Indian securities market.

Understanding the Operational Guidelines

Chapter 1: Registration of FVCIs

This chapter details the regulatory framework surrounding the registration and compliance requirements for FVCIs as managed by DDPs.

1. Engagement of DDPs by Existing FVCIs
2. Deadline for Engagement: Existing FVCIs must engage a DDP by March 31, 2025, for due diligence on their continued registration.
3. Consequences for Non-Engagement: Failure to engage a DDP by the deadline will bar FVCIs from making further investments. Listed investments must be liquidated by March 31, 2026, and other investments by March 31, 2027, followed by an application to surrender registration within 30 days post-liquidation. Compliance with Eligibility Criteria
4. Due Diligence by DDP: DDPs must assess compliance with eligibility within 6 months of engagement. If the FVCI fails to meet eligibility criteria, it may not make new investments but can maintain or sell existing ones.
5. AML/CFT and Sanctions Compliance: FVCIs must comply with the Prevention of Money-laundering (PML) Rules and avoid UN Security Council Sanctions List associations. DDPs must report any violations to SEBI within 7 days.
6. Transfer of FVCI Data: Upon engagement, the DDP may request registration-related information from SEBI to process the FVCI’s continued registration or application.

2. Application Processing by DDPs

• Country Check: DDPs verify the applicant’s country based on IOSCO MMoU, SEBI bilateral agreements, BIS membership, or FATF membership.
• Fit and Proper Person Check: DDPs check if the applicant meets eligibility criteria under SEBI’s regulations.
• Regulatory Check: The applicant’s regulatory standing and history with other jurisdictions are verified to ensure the validity of the license or registration.
• Obtain a copy of certificate issued by such regulator or;
• verify the registration details directly from the registry or the website of such regulator
• Beneficial Ownership Verification: DDPs confirm beneficial ownership in line with PML Rules.

3. Continuance and Renewal of Registration

• FVCIs registered on or before December 31, 2019, must renew their registration and update information by March 31, 2025. FVCIs registered after this date must renew every five years.
• Late Fee and Liquidation: Failure to pay the renewal fee results in a late fee, and continued failure will lead to mandatory liquidation of investments within 1 or 2 years depending on the investment type.

4. Surrender and Transfer of Registration

• Surrender Process: When surrendering registration, the DDP ensures that the FVCI holds no investments and has closed all accounts. The DDP also verifies that no actions or dues are pending with SEBI.
• Change of DDP: If an FVCI changes its DDP, the transition must be completed within 30 days. Both the old and new DDPs must provide joint confirmation to SEBI.

5. Material Changes and Reporting: Critical changes affecting registration must be reported within 7 working days, with supporting documentation submitted within 30 days.

6.Registration Number: The DDP shall grant the certificate of registration, bearing registration number generated by SEBI.

7. Name Change: In case the FVCI has undergone a change in name, the request for updation/ incorporation of a new name should be submitted by the FVCI to the DDP accompanied by documents certifying the name change. Such name change can be evidenced by:

• Information available on the website of the home regulator; or
• Certified copy of document(s) from home regulator; or
• Certified copy of document(s) from Registrar of Company (or equivalent authority) (wherever applicable) issued; or
• Where above is not applicable, a Board Resolution or equivalent authorizing the name change.

Chapter 2: Know Your Client (KYC) Requirements for FVCIs

1.KYC Process Overview:

• FVCIs must submit KYC documents to intermediaries.
• Once KYC is completed, intermediaries upload forms and documents to the KYC Registration Agencies (KRA) portal.
• Each intermediary may have additional documentation requirements for enhanced due diligence.

2. Key KYC Documentation for FVCIs:

• Applicant Level Documents: Memorandum of Association (MoA), Certificate of Incorporation (COI), Prospectus, etc.
• Proof of Address: Power of Attorney (PoA) may be used.
• PAN: Mandatory for FVCIs but not for UBOs, senior management, or authorized signatories.
• Board Resolution/FATCA/CRS Form: Required for FVCIs.
• Authorized Signatories: A signature list must be provided.
• Ultimate Beneficial Owner (UBO): A list of UBOs and relevant details must be submitted.

3. Exceptions and Special Provisions:

• If KYC is conducted by another entity from the same financial group (regulated in a FATF member country), a reliance undertaking can be provided.
• Prospectus and Information Memorandum can substitute for constitutive documents.
• PAN verification can be done online; no physical certification is required if e-PAN is used.
• UBO identification is not required for government or government-related entities.

4. Sharing KYC Documents with Banks:

• Intermediaries must share relevant KYC documents with banks for opening FVCI bank accounts.
• Proper certification of the documents is required, and records of document transfers must be maintained.

5. Beneficial Owner (BO) Identification:

• BOs must be identified according to Rule 9 of the Prevention of Money Laundering (PML) Rules.
• Identification of BO is based on ownership, control, or entitlement in FVCIs.
• For complex structures, a look-through basis is used to identify BOs in intermediate entities.

6. Periodic KYC Review:

• High-risk jurisdictions require annual KYC reviews; other jurisdictions require reviews every five years.
• Custodians may request updated documents if there are changes.

7. Data Security for KYC Information:

• KRAs must protect BO and SMO’s personal information.
• Information can be accessed by intermediaries with the consent of the FVCI through an authentication process.

8. Record Maintenance: Custodians must maintain KYC records for at least five years after cessation of transactions or until litigation concludes.

9. Document Verification Guidelines:

• Originals must be verified, or notarized copies must be submitted.
• SWIFT mechanisms may be used for verification by authorized bank officials.
• If documents are in a foreign language, English translations are required.

10. Supporting Documents for Proof of Address:

• Acceptable documents include government-issued IDs, utility bills (not older than 2 months), bank statements (not older than 3 months), and notarized PoA.

Conclusion

The updated FVCI regulations reflect SEBI’s proactive stance in strengthening India’s regulatory framework for foreign investments. By mandating FVCI registration through DDPs and tightening compliance through KYC, AML, and ownership transparency checks, SEBI ensures robust investor protection and alignment with global standards. The focus on periodic reviews, data security, and efficient registration renewal mechanisms provides a streamlined yet secure environment for venture capital inflows. These regulations not only enhance regulatory oversight but also foster greater confidence in India’s investment landscape, potentially attracting more foreign capital.