The Government of India through gazette notification dated March 07, 2023[i] and September 04, 2023[ii], amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, inter-alia, to revise the thresholds for determining the beneficial ownership.
Accordingly, the Securities and Exchange Board of India (SEBI) vide its circular SEBI/HO/AFD/PoD1/CIR/2024/2 dated January 11, 2024, amended para 4.1.2. Under Chapter 4 i.e. Investments in AIFs of SEBI Master Circular No. SEBI/HO/AFD/PoD1/P/CIR/2023/130[iii] dated July 31, 2023 for AIFs.
The erstwhile para 4.1.2 read as follows
The investor or its underlying investors contributing twenty-five percent or more in the corpus of the investor or identified based on control, is not the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and is not a resident in the country identified in the public statement of Financial Action Task Force as–
i. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
ii. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies
However, the same is amended as below:
The investor, or its beneficial owner as determined in terms of sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, is not the person(s) mentioned in the Sanctions List notified from time to time by the United Nations Security Council and is not a resident in the country identified in the public statement of Financial Action Task Force as –
i. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
ii. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
Further, in case an investor who has been already on-boarded to the scheme of an AIF, does not meet the revised condition as specified above, the manager of the AIF shall not draw down any further capital contribution from such investor for investing, until the investor meets the said condition.
Thus, SEBI with an intention to combat money laundering modified the threshold limit as provided under para 4.1.2 under chapter 4 of the SEBI Master Circular No. SEBI/HO/AFD/PoD1/P/CIR/2023/130 dated July 31, 2023, for AIFs, to bring it in line with the sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.
Impact:
AIFs onboarding foreign investors will have to ensure more due diligence, with the threshold limit being reduced from 25% to 10% as defined under sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 and with the said amendment more indirect participants will come into the due diligence reporting framework.
Conclusion: SEBI’s proactive amendment aligns AIF investment regulations with stringent money laundering prevention rules. The reduction in the beneficial ownership threshold to 10% necessitates thorough due diligence, impacting foreign investors and expanding the scope of participants in the reporting framework. AIFs must adapt to these changes, ensuring compliance and reinforcing the financial system’s integrity against money laundering risks.
[i] https://taxguru.in/corporate-law/prevention-money-laundering-maintenance-recordsamendment-rules-2023.html#google_vignette
[ii] https://taxguru.in/corporate-law/prevention-money-laundering-maintenance-records-amendment-rules-2023.html
[iii] https://taxguru.in/sebi/sebi-master-circular-alternative-investment-funds-aifs.html
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