Listed-entity exemption

Beneficial ownership rules exist because a company can hide the people behind it. A company listed on a stock exchange is a poor place to hide anyone. Its big shareholders must be disclosed under exchange rules and securities law. Anyone can look them up.

So the PML Rules and the IFSCA Guidelines switch off the look-through for listed entities. The test looks at the customer, or at the owner of its controlling interest. The exemption applies if that entity is listed on a stock exchange in India. It also applies if the entity lives in, and is listed in, a jurisdiction notified by the Central Government. And it applies to a subsidiary of such a listed entity. In these cases the regulated entity does not have to identify its shareholders or beneficial owners. Nor does it have to verify who they are.

The IFSCA version adds a condition the exam likes. The exemption does not hold if the entity has doubts about the customer due diligence (CDD) information. It also fails if the entity suspects a link with money laundering or terrorist financing (ML/TF).

The Rule — 9(3)(f) (Chapter 3). Where the client or the owner of the controlling interest is (i) an entity listed on a stock exchange in India, or (ii) an entity resident in jurisdictions notified by the Central Government and listed on stock exchanges in such jurisdictions, or (iii) a subsidiary of such listed entities, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such entities.

The IFSCA version (Chapter 6, section 6.3.6(e)–(f)). The same three categories, plus such other entities excluded from the beneficial-ownership requirements under the Act and Rules — and the exemption applies unless the regulated entity has doubts about the veracity of the CDD information, or suspects that the customer may be connected with ML/TF.

The related proviso (section 6.3.6(g), from Rule 9(1)). Where a customer subscribes to or deals in depository receipts or equity shares of an Indian company issued or listed in notified jurisdictions, acting for a beneficial owner resident in that jurisdiction, the beneficial owner is determined as per the norms of that jurisdiction, and sub-rules (3) to (9) of Rule 9 do not apply.

What the exemption switches off — the beneficial-ownership ladder:

What it does not switch off. CDD on the customer itself: its name, unique identification number, registered address, date and place of incorporation, legal form, constitution and powers; screening of related or connected parties; and verification of natural persons acting on its behalf.

Related risk rules. A public company listed on a stock exchange and subject to disclosure requirements ensuring adequate transparency of beneficial ownership is a low-risk customer indicator — though one factor alone may not always indicate low risk. For customers not exempt, no business relationship may be established where ownership or control arrangements prevent identification of one or more beneficial owners.

Illustrative customers of an IFSC fund management entity.

Sabarmati Global Fund Management (IFSC) onboards three corporate investors.

Arithmetic check for B. Harbour's ownership: parent 70%, a founder 18%, twelve employees sharing 12% (1% each). The founder, at 18%, is above 10% and is a beneficial owner in his own right; no employee is. The parent's own beneficial owners are traced through its chain because it is not exempt.

The lesson of C. Listing buys an exemption from look-through, not from judgement.

Rule 9(3)(f) is in Chapter 3 (PML Rules, 2005); Chapter 6 (IFSCA Guidelines for KYC Norms), section 6.3.6(e) to (g), restates it with the doubts-or-suspicion override and the depository receipts proviso; section 6.1.3 makes listed public companies a low-risk indicator; section 6.1.4 bars relationships where beneficial owners cannot be identified. Expect a question on which entities qualify (including subsidiaries and notified foreign jurisdictions) and on when the exemption stops applying.

• It exempts identification of shareholders and beneficial owners — not CDD on the customer itself.
• Three categories: listed in India; resident in and listed in a notified jurisdiction; or a subsidiary of either.
• A foreign listing counts only if the jurisdiction is notified by the Central Government.
• The IFSCA override: doubts about the veracity of CDD information, or suspicion of ML/TF, end the exemption.
• Listed does not automatically mean low risk. It is one low-risk indicator; the overall risk is examined.
• The workbook gives two trust thresholds. Section 6.3.5(b)(i) of Chapter 6 identifies beneficiaries with fifteen per cent or more interest in a trust; section 6.3.6(d), on the next page, and Rule 9(3)(e) in Chapter 3 say ten per cent or more. The PML Rules' 10% is the statutory figure, and the Guidelines' own explanation applies any Rule 9(3) amendment in addition — but expect either number to appear in an option.