Depository ownership queries have custodian banks in a quandary

Under the recently introduced new Significant Beneficial Owners (SBO) rules by the ministry of corporate affairs (MCA), companies are now to identify beneficial owners based on shareholding patterns, voting rights and control. The companies are hence asking custodian banks to furnish an official undertaking that none of the holders qualify as SBOs.

Indian companies seeking ownership details of their global and American depositary receipts has leading global custodian banks in a fix, reports ET online. 

Under the request from Indian companies, custodians are required to give an official undertaking that none of the holders qualify as Significant Beneficial Owners (SBOs) of the respective companies under new Indian government norms. Custodian banks fear that without complete information doing so can become a legal issue. 

Notably, the information is being sought in the light of the recently introduced new SBO rules by the ministry of corporate affairs (MCA). Companies are now to identify beneficial owners based on shareholding patterns, voting rights and control. However, ascertaining the end beneficiaries of depository receipts is more difficult than with normal shareholders. There are confidentiality clauses and lack of such information with the custodian banks that make the process difficult. 

The new MCA rule is aimed at establishing who is in actual control of a company and ensure that SBOs of companies are not concealing holdings through shell companies. 

The rules came amid growing concern of regulators that rich individuals may be laundering money through shell entities and funneling them into corporates. 

The new rules apply to both listed and unlisted entities and require companies to disclose the names of SBOs based on three criteria — a person or entity that receives more than 10% of distributable dividend, enjoys 10% of voting rights or holds more than 10% stake, the report said.

The report quoted Tejesh Chitlangi, partner, IC Universal Legal: “There are practical concerns in determining the significant beneficial ownership with respect to certain omnibus structures, which are indirect investors in Indian securities being invested through FPIs (foreign portfolio investors) or depository receipts.” He added that confidentiality issues, international privacy norms, or the layered nature of such structures makes applying the criteria difficult.

However, most funds that invest in depository receipts use such omnibus structures and this makes determining the actual beneficiaries difficult. 

Securities and Exchange Board of India (Sebi) does not permit  such structures to register for direct investments, however, there is no bar on them purchasing depository receipts. Most of these are funds of funds that pool money from a complex web of entities, the report said.

It is also a huge challenge  to determine aggregate ownership as an investor could have exposure to a company both through direct equity, depository receipts and multiple funds, the report said. 

However, it may be possible for regulators such as the US Securities and Exchange Commission (SEC) to compile such end-beneficiary data and Sebi can seek this through the information-sharing arrangements of the International Organisation of Securities Commissions (Iosco), the report quoted Chitlangi as saying. 

“The global custodian banks are facing several difficulties due to the new SBO rules as they may not have the end beneficiary information available with them beyond a point,” the report quoted Vinita Nair, partner, Vinod Kothari and Co. Even in cases where the information is available, they could be bound by various confidentiality clauses. Nair suggested that the  government should consider exempting ADRs and GDRs from the purview of the new SBO rules. 

Some of the leading custodians that cater to Indian companies include BNY Mellon, JPMorgan Chase and Deutsche, the report said.

Source: ET Online

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