Introduction: The Securities and Exchange Board of India (SEBI) has recently issued a crucial circular, SEBI/HO/AFD/PoD1/CIR/2024/2, dated January 11, 2024, addressing foreign investment in Alternative Investment Funds (AIFs). This communication comes in response to amendments made to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, by the Government of India.
Detailed Analysis:
1. Regulatory Amendments: The circular highlights amendments made on March 07, 2023, and September 04, 2023, to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. These changes, including revised thresholds for determining beneficial ownership, have far-reaching implications for AIFs operating in India.
2. Modification of SEBI Master Circular: Chapter 4 of SEBI Master Circular No. SEBI/HO/AFD/PoD1/P/CIR/2023/130, dated July 31, 2023, for AIFs undergoes modification in light of the amended rules. Specifically, para 4.1.2. is altered to address the new conditions regarding the investor’s beneficial ownership.
3. Enhanced Due Diligence: A critical aspect highlighted in the circular is the importance of ensuring that the investor or its beneficial owner, as defined by rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, does not appear in the Sanctions List issued by the United Nations Security Council. Additionally, investors should not be residents of countries identified by the Financial Action Task Force for AML/CFT deficiencies.
4. Implications for Existing Investors: The circular outlines a significant impact on existing investors who fail to meet the revised conditions. In such cases, AIF managers are prohibited from drawing down further capital contributions from these investors until compliance with the specified conditions is achieved.
5. Immediate Implementation: The circular is effective immediately, emphasizing the urgency of compliance with the revised regulations. AIFs are expected to align their operations promptly with the new guidelines to avoid regulatory repercussions.
Conclusion: In conclusion, SEBI’s recent circular brings forth crucial changes in the foreign investment landscape for Alternative Investment Funds. AIFs must diligently adhere to the amended rules to ensure compliance and mitigate potential risks. The immediate enforcement of the circular underscores the regulatory commitment to safeguarding investor interests and fostering a secure and transparent securities market in India.
This article is intended to provide an insightful overview of the SEBI circular, offering a comprehensive understanding of the regulatory changes and their implications on AIFs operating in India. For further details, readers are encouraged to refer to the official circular available on the SEBI website under the categories “Legal framework – Circulars” and “Info for – Alternative Investment Funds.” For any queries or clarifications, please contact Sanjay Singh Bhati, Deputy General Manager, at ssbhati@sebi.gov.in or +91-22-26449222.
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Securities and Exchange Board of India
Circular No. SEBI/HO/AFD/PoD1/CIR/2024/2 Dated: January 11, 2024
To,
All Alternative Investment Funds
Sir / Madam,
Sub: Foreign investment in Alternative Investment Funds (AIFs)
1. The Government of India through gazette notification dated March 07, 2023 and September 04, 2023 has amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, inter-alia, to revise the thresholds for determining the beneficial ownership.
2. In view of the amendments to the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, para 4.1.2. under Chapter 4 of SEBI Master Circular No. SEBI/HO/AFD/PoD1/P/CIR/2023/130 dated July 31, 2023 for AIFs stands modified as mentioned 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.
3.In case an investor who has been already on-boarded to scheme of an AIF, does not meet the revised condition as specified at para 2 above, the manager of the AIF shall not drawdown any further capital contribution from such investor for making investment, until the investor meets the said condition.
4. The provisions of this circular shall come into force with immediate effect.
5. This circular is issued with the approval of the competent authority.
6. This circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
7. The circular is available on SEBI website at sebi.gov.in under the categories “Legal framework – Circulars” and “Info for – Alternative Investment Funds”.
Yours faithfully,
Sanjay Singh Bhati
Deputy General Manager
Tel no.: +91-22-26449222
ssbhati@sebi.gov.in
