The Securities and Exchange Board of India (Sebi) is considering a proposal to allow "omnibus" structures for trades in Gujarat International Finance Tec-city (GIFT City).
“This is one of the minor tweaks sought by international investors. Omnibus structures are allowed in every major jurisdiction around the world. The regulator is discussing it,” said an official who was part of these discussions.
What is an omnibus account
An ‘omnibus’ account, usually used by derivatives traders, is opened in the name of an account provider, and securities belonging to several clients are credited to this account.
For example, Morgan Stanley has an omnibus account with a local broker in GIFT City. The clients of Morgan Stanley can take exposures without going through KYC procedures.
These structures are different from participatory notes (P-notes) but provide a similar kind of anonymity, earlier offered by these offshore derivatives, to foreign investors.
An e-mail sent to Sebi’s spokesperson on Tuesday seeking details of the proposal did not elicit any response.
How will the move help GIFT City?
If allowed, the move will bring the Ahmedabad-based financial centre on a par with its counterparts in Singapore and Dubai and could be a big boost to Indian exchanges' plans to bring offshore volumes on Indian indices back home. Both BSE and NSE have opened their respective international bourses within GIFT.
The demand for omnibus facility came up during investor discussions initiated by exchanges after they snapped licensing agreements with overseas bourses. Exchange officials are keen to promote GIFT City, the marquee project of Prime Minister Narendra Modi, and help it become a global hub for international currency and stock traders. Their moves have gathered pace after the budget announcement on waiver of short-term capital gains tax for trades in GIFT City. “Before the waiver, it was simply not possible to attract international traders. But now things are different,” said an executive with a brokerage.
The existing licensing agreements with overseas products like SGX Nifty run up till August. While the overseas bourses are working on alternative products to protect their volumes, Indian bourses are leaving no stone unturned to get the GIFT City index products up and running.
Exchange officials have already held consultations with some of the top volume providers in SGX Nifty in New York and London, including top securities firms such as Goldman Sachs and Morgan Stanley.
What an investor wants
About 50 local securities firms that have opened shops in GIFT City are meeting global investors and conducting roadshows.
In these interactions, investors expressed concerns about the future tax regime in GIFT City. They also sought easy-to-operate structures such as omnibus accounts, officials said.
In 2015, a Supreme Court-appointed special investigation team on black money had expressed concerns over the nature of money entering India through the offshore derivatives, including P-notes. Following this, Sebi had made disclosure of identity of the ultimate beneficiary in P-notes mandatory and imposed restrictions on transferability. Some analysts have suggested that a lot of P-note volumes moved to other products such as SGX Nifty following these restrictions.
While roundtripping concerns through omnibus structures resurfaced at the regulatory level, exchanges are said to have assured that since the money comes in and goes out as dollars, there was no question of roundtripping.
Note of caution
Lawyers and investors feel a balance needs to be struck between ease of transactions and transparency.
"In case of omnibus structures, regulatory policy would require to balance-ease-of-doing business by providing confidentiality and fewer bottlenecks versus compliance concerns of money laundering and financing through opaque structures. While identifying or verifying ultimate beneficial ownership need not be a precondition, placing a threshold on what an intermediary can allow exposure to a client may be considered as a preliminary phase," said Sumit Agrawal, a regulatory lawyer and a former Sebi official.
UR Bhat, managing director, Dalton Capital Advisors (India), a foreign portfolio investor said, “We need to understand what exactly these omnibus structures are and what they are going to allow. P-notes could be one such structure. But even in P-notes, Sebi had come up with the rule that the ultimate beneficiary has to be disclosed. If this new structure is allowed, it will be going back on that. It is not clear if that is good for the integrity of the financial markets.”
Bhat referred to the global move towards cleaner and transparent markets and added that one needs to wait for more details to emerge.
Action on GIFT City
Feb. 1, 2018: Budget announcement on waiver of short-term capital gains tax
Feb. 9, 2018: NSE, BSE snap licensing ties with overseas bourses
Feb. 15, 2018: MSCI slams Indian bourses’ move as anti-competitive
February 2018: Bourses, brokers meet institutional investors; discussions with Sebi
August 2018: Notice period on products such as SGX Nifty will expire
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