Non-FATF members like Mauritius and Cayman Islands to be hit by new SEBI rules

Financial centres like Mauritius, Cayman Islands and Cyprus which are not Financial Action Task Force (FATF) members will not be allowed to deal in participatory notes as per the new rules laid by Securities and Exchange Board of India (SEBI). The FATF is an intergovernmental policy-making body that was established at the 1989 Paris summit of G7 amid mounting concerns over money laundering.

Currently, FATF has a 39-member body and the new rule is expected to impact many public equity funds and hedge funds.

In its latest notification, SEBI has limited the participation of foreign portfolio investors (FPI) in India's investment market. According to the notification, only those foreign portfolio investors located in FATF countries or managed by an entity based in a FATF jurisdiction will be allowed to deal in participatory notes (PNs). PNs are offshore derivative instruments with Indian stocks, futures and options as underliers.

Under the new operating guidelines, SEBI will highlight whether there would be other restrictions as well on funds from non-FATF countries. In short, it would include the extent to which non-FATF funds will be required to disclose their beneficial ownership; whether these funds would be recognized as ‘institutional investors’ that are allowed to invest in public security offerings and current contracts; and whether these funds would be impacted by a tax on indirect transfers.

Based on the HR Khan committee’s recommendations, the new FPI regulation says that “regulated funds” have to be either from FATF member countries or else in case of unregulated funds the investment manager has to be from FATF member countries.