India rethinking KYC rules
Indian finance minister P. Chidambaram says the government is working towards further simplifying the know-your-client (KYC) documentation process when approving foreign investors, with the aim of getting different regulators to agree on one set of requirements.
Foreign institutional investors have retreated from India’s equity markets in reaction to erratic, and sometimes draconian, policy. For example, last year the government introduced its general anti-avoidance rule (Gaar). This was meant to curb tax evasion, but many foreigners deem it punitive and unfair. The measure has since been postponed to 2016, but its passage prompted a wave of redemptions.
India cannot afford to lose the favour of global fund managers. It relies on foreign investment to help plug the country’s fiscal deficit, now 5.9% of GDP. The finance minister has embarked on a roadshow to boost confidence in India’s story.
While in Hong Kong this week, he tells AsianInvestor that one technical measure of concern to equity managers – the know-your-client (KYC) rule – is being addressed.
“KYC norms vary among segments of the financial sector. We want these to converge,” Chidambaram tells us.
Currently, foreign investors wanting to invest or trade in India’s securities market must work with their custodian and compliance division at their brokers over a myriad of KYC documentation, and identify verification procedures across various regulators and stock exchanges.
The Securities and Exchange Board of India (Sebi) issued circulars last year in its attempt to simplify the KYC processes. In August, it specifically targeted KYC procedures for investment managers’ use of direct market access (DMA) technology; and another one in September covered foreign institutional investors (FIIs) and qualified foreign investors (QFIs) and their custodians.
Still, traders at asset management firms and their brokers and custodians say the processes remain cumbersome and vary between the Bombay Stock Exchange, the National Stock Exchange and Sebi. Foreign exchange is another area of duplicated or contradictory regulation.
“For India, we need to invest in more manpower to deal with such long documentation processes,” says a global custody banker in India. “Worse, we cannot tell our FII or QFI clients exactly how long the process takes, as really nobody knows. This impairs foreign fund managers’ ability to launch a fund, because the existing process lacks transparency.”
Meanwhile, it remains unknown whether the imminent announcement on KYC requirements will also incorporate changes to be made on the use of DMA.
For electronic trading, Sebi’s August circular has introduced a “terms and conditions” document in its bid to streamline the trading account opening process between brokers and their investment manager clients. There are plenty of hurdles that currently impede electronic trading, and fund managers hope the finance ministry will remove these.
Lawrence Au, Asia-Pacific head of BNP Paribas Securities Services, says finance minister Chidambaram appears to be a very open-minded official, and understands the importance of putting policies in place that make India more investor-friendly.
“Unlike some government officials, P. Chidambaram understands that the stickiness of capital market investment is very high," says Au. "He understands that the more India can attract capital market investment, the better chance the government has to relieve its current budget deficit.
"This is why during his recent roadshow he has primarily focused on attracting foreign institutional investors and qualified foreign investors."