In order to combat money laundering, the Reserve Bank of India (“RBI”) has issued another notification on 14 June, 2021 (“Notification”)[1], imposing certain restrictions on investors from or investments made through non complaint Financial Action Task Force (“FATF”) jurisdictions in Indian-based Payment System Operators (“PSO”).
What is FATF?
FATF is an inter-governmental organization that combats money laundering and terrorism financing, which periodically identifies jurisdictions having weak measures to combat money laundering and terrorism financing under two headers: (i) high-risk jurisdictions subject to a Call for Action (Blacklist) comprising of Iran and Democratic People’s Republic of Korea; and (ii) jurisdictions under Increased Monitoring (‘grey list’)[2]. This list serves as a signal to the global financial and banking system about increased risks in transactions with the listed countries and may negatively impact the economy of such countries. Under the Notification, countries featuring in both these categories have been classified as non-compliant FATF countries.
Background
The foreign portfolio investment regime in India was overhauled by the introduction of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 which places an increased focus on classification of countries or jurisdictions by FATF, when prescribing eligibility criteria for registration as a Foreign Portfolio Investor (“FPI”).
RBI with a view to combat money laundering issued a Notification on 12 February, 2021 (“NBFC Notification”), declaring that new investors from or through non-complaint FATF jurisdictions cannot, directly or indirectly acquire ‘significant influence’ in India-based non-banking financial companies (“NBFCs”). The clarifications issued under the NBFC Notification were also relevant for Indian Alternative Investment Funds (AIFs) that had Mauritius-based feeders. The NBFC Notification directly impacted several India focused investment funds that had been set up in Mauritius, as Mauritius was put under the ‘grey list’ by FATF in February 2020 due to certain systemic deficiencies. These systemic deficiencies included a lack of access to accurate beneficial ownership information by competent authorities, absence of capacity to prevent money laundering and inability to conduct financial investigations.
However, despite being featured in the ‘grey list’, the Department of Economic Affairs (DEA) at the Ministry of Finance has upgraded[3] Mauritius to Category I FPI jurisdiction, putting Mauritius at par with those set up in FATF member jurisdictions. This resulted in lack of clarity for the fund managers who were concerned about whether to consider Mauritius while setting up fund structures and how to work with the existing legacy structures. However, this confusion was significantly reduced due to the NBFC Notification.
In view of the NBFC Notification, the RBI has now issued the present Notification.
Existing Investors
The restrictions under the Notification will not apply to existing investments in the PSOs from FATF non-compliant jurisdictions. They have also been permitted to bring in additional investment to support their existing business in India. However, such additional investment should be in accordance with the extant regulations.
New Investors
New investors from or through FATF non-compliant Jurisdictions will be prohibited from directly or indirectly acquiring ‘significant influence‘ in existing PSOs as well as in entities seeking authorisation as PSOs. The term ‘significant influence‘ is defined as having more than 20% of the actual and potential voting power. Therefore, this prohibits new investors from FATF non-compliant jurisdictions from acquiring more than 20% of the voting rights in PSOs directly or indirectly.
The Notification requires considering the aggregate of the actual and potential voting power. The potential voting power includes rights on account of instruments that are convertible into equity, other instruments with contingent voting rights, contractual arrangements, contingent voting rights, etc.
Applicability
The aforementioned restrictions shall apply to any entity (i) which has already applied; or (ii) any entity which intends to apply, for authorisation as a PSO under the Payment and Settlement Systems Act, 2007.
Conclusion
While the Notification of the RBI is a welcome step and clarifies the position on certain aspects of investments from FATF non-compliant jurisdictions. In particular, the clarity on potential voting rights is extremely helpful and does not leave any room for ambiguity while deciding the nature of instruments for the relevant foreign investment.
However, there also certain positions which have not been clarified, for e.g., what happens if an entity is not registered as a PSO and has existing investors from FATF non-compliant jurisdictions – does such a fact situation get exempted under the Notification? Is such an entity permitted to receive foreign investment from existing investors based in FATF non-compliant jurisdictions and subsequently apply for a PSO registration to the RBI? Moreover, the Notification does not specify the date of applicability.
- Accessible at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12114&Mode=0 ↑
- Accessible at https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-february-2021.html ↑
- Order dated April 13, 2020 issued by Department of Economic Affairs (DEA), Ministry of Finance, Government of India ↑
Authored by Abhinav Bhalaik, Partner, Namitha Mathews, Partner, Mayank Jhunjhunwala, Senior Associate and Purva Kohli, Associate.
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