Banks Look For a Way Out of UBO Tangle

Banks struggle with global disclosure rules on Ultimate Beneficial Owners (UBOs), affecting investments and compliance.

Source and citation: “Banks Look For a Way Out of UBO Tangle,” by Sugata Ghosh, ET Bureau.

Table of Contents

TLDR For This Article:

Banks in India face difficulties tracking Ultimate Beneficial Owners (UBOs) of investors due to complex global disclosure standards. This affects compliance with anti-money laundering (AML) regulations and could lead to challenges in managing Foreign Direct Investments (FDI) and Overseas Direct Investments (ODI).

Analysis of this news for a layman:

Banks play a major role in channelling money across borders through FDI and ODI. They’re required by Indian law to identify the “Ultimate Beneficial Owner” (UBO)—the real person who has control or significant ownership over investments. If any shareholder owns 10% or more of the entity’s equity, or contributes significantly to private equity funds, they are classified as UBOs. However, global inconsistencies in disclosure requirements make it difficult for banks to identify these UBOs, particularly in multi-layered ownership structures across jurisdictions with less demanding disclosure standards.

This issue gets even more complicated when considering investments from countries with different policies or higher regulatory scrutiny. For example, investors from nations like China face stricter checks due to India’s geopolitical and economic concerns. Also, laws differ across countries, like the US, where top company officials are recognized as UBOs alongside promoters—a practice that doesn’t align well with Indian customs where family promoters prefer not to mix their identity with senior employees.

Banks are struggling to comply with these standards, given that they’re often unable to dig deep into ownership structures, leading to potential conflicts with regulations. Additionally, the Financial Action Task Force (FATF), a global anti-money laundering body, places further restrictions on investors from non-compliant countries, impacting both FDI and non-banking financial investments.

Impact on Retail Investors:

Complexity in Investments: The global inconsistency in UBO rules means that Indian retail investors need to be aware of potential complexities when investing internationally or holding stakes in companies with foreign ownership.
Increased Regulatory Scrutiny: Investors should be prepared for increased transparency and compliance requirements when dealing with foreign entities or funds, which could impact the speed and ease of investment decisions.
Geopolitical Implications: Investments from countries like China face greater scrutiny, making retail investors cautious about potential risks associated with geopolitics and regulatory changes.

Impact on Industries:

Banking and Financial Services: Major banks like HDFC Bank, ICICI Bank, and Axis Bank, who facilitate FDI and ODI transactions, are at the centre of this regulatory tangle. Compliance costs and processes may rise, potentially impacting profit margins and customer onboarding.
Private Equity & Asset Management: Entities like Kotak Mahindra Bank, which manage private equity investments, could be affected as their disclosure norms become more stringent. Increased compliance might limit flexibility in investment strategies.
Non-Banking Financial Companies (NBFCs): NBFCs such as Bajaj Finance and HDFC Ltd could face limitations on foreign funding from non-FATF-compliant investors, influencing their growth and expansion prospects.
Real Estate and REITs: Companies with complex ownership, like Embassy Office Parks REIT or Mindspace Business Parks REIT, may face challenges in identifying UBOs, affecting investor confidence and the flow of foreign capital into these sectors.

Long Term Benefits & Negatives:

Benefits:

Greater Transparency: If banks and regulatory authorities find a way to streamline UBO disclosure, it could lead to greater transparency in investment structures, fostering investor trust and market stability.
Improved AML Standards: Stricter UBO tracking aligns with global anti-money laundering standards, ensuring safer and more secure investments, which ultimately benefits the financial ecosystem.
Stronger Corporate Governance: Enhanced clarity on ownership structures will likely improve corporate governance practices, benefiting both the financial sector and overall market integrity.

Negatives:

Increased Compliance Burden: The complexity of tracking UBOs across different jurisdictions will likely increase administrative costs for banks and other financial institutions, impacting profitability.
Possible Investment Slowdown: Stricter UBO requirements may discourage foreign investment, as some investors might be wary of enhanced disclosures or regulatory hurdles, potentially slowing down FDI inflows.

Short Term Benefits & Negatives:

Benefits:

Improved Investor Confidence: Efforts to streamline UBO disclosures could reassure domestic and international investors about the integrity of the Indian financial system.
Compliance Clarity: For industries handling FDI and ODI, clarification on UBO regulations can help create more straightforward compliance pathways, reducing uncertainties in the short term.

Negatives:

Operational Challenges for Banks: Banks may face immediate operational challenges in adjusting to new disclosure requirements, potentially leading to delays or disruptions in processing FDI and ODI transactions.
Investor Concerns: With increasing scrutiny around ownership structures, investors could face short-term anxiety over potential regulatory changes, affecting their willingness to invest in certain sectors or countries.

Analysis of UBO Tangle Impact on Indian and Global Companies

Indian Companies That Could Gain from the UBO Tangle

Adani Group: While the UBO rules were initially framed in response to allegations against the Adani Group, the clarification and potential changes in these rules could benefit the group. A more streamlined and consistent UBO identification process could improve the group’s ability to attract foreign investment.
Reliance Industries: As a major Indian conglomerate with significant foreign investments, Reliance could benefit from clearer and more consistent UBO identification rules. This could make it easier for the company to attract foreign capital and expand its global operations.
Tata Group: As another major Indian conglomerate with significant foreign investments, Tata could benefit from clearer and more consistent UBO identification rules. This could make it easier for the company to attract foreign capital and expand its global operations.
HDFC Bank: As India’s largest private sector bank, HDFC Bank could benefit from clearer and more consistent UBO identification rules. This could make it easier for the bank to attract foreign capital and expand its international operations.
ICICI Bank: As a leading Indian private sector bank, ICICI Bank could benefit from clearer and more consistent UBO identification rules. This could make it easier for the bank to attract foreign capital and expand its international operations.

Indian Companies That Could Lose from the UBO Tangle

NBFCs: Non-banking financial companies (NBFCs) could be negatively impacted by stricter UBO identification rules. This could make it more difficult for NBFCs to attract foreign capital, especially if they have complex ownership structures.
Mid-cap companies: Mid-cap companies with complex ownership structures could be negatively impacted by stricter UBO identification rules. This could make it more difficult for these companies to attract foreign capital and expand their operations.
Startups: Startups with complex ownership structures could be negatively impacted by stricter UBO identification rules. This could make it more difficult for startups to attract foreign capital and grow their businesses.
Real estate companies: Real estate companies with complex ownership structures could be negatively impacted by stricter UBO identification rules. This could make it more difficult for these companies to attract foreign capital and expand their operations.
Infrastructure companies: Infrastructure companies with complex ownership structures could be negatively impacted by stricter UBO identification rules. This could make it more difficult for these companies to attract foreign capital and expand their operations.

Global Companies That Could Gain from the UBO Tangle

Foreign investors: Global investors could benefit from clearer and more consistent UBO identification rules in India. This could reduce uncertainty and make it easier for foreign investors to invest in Indian companies.
Foreign banks: Foreign banks with operations in India could benefit from clearer and more consistent UBO identification rules. This could make it easier for these banks to conduct their business in India and attract more clients.
Foreign private equity funds: Foreign private equity funds investing in India could benefit from clearer and more consistent UBO identification rules. This could reduce uncertainty and make it easier for these funds to invest in Indian companies.
Foreign hedge funds: Foreign hedge funds investing in India could benefit from clearer and more consistent UBO identification rules. This could reduce uncertainty and make it easier for these funds to invest in Indian companies.
Foreign asset managers: Foreign asset managers investing in India could benefit from clearer and more consistent UBO identification rules. This could reduce uncertainty and make it easier for these asset managers to invest in Indian companies.

Global Companies That Could Lose from the UBO Tangle

Foreign investors with complex ownership structures: Global investors with complex ownership structures could be negatively impacted by stricter UBO identification rules in India. This could make it more difficult for these investors to invest in Indian companies.
Foreign banks with complex ownership structures: Foreign banks with complex ownership structures could be negatively impacted by stricter UBO identification rules in India. This could make it more difficult for these banks to conduct their business in India.
Foreign private equity funds with complex ownership structures: Foreign private equity funds with complex ownership structures could be negatively impacted by stricter UBO identification rules in India. This could make it more difficult for these funds to invest in Indian companies.
Foreign hedge funds with complex ownership structures: Foreign hedge funds with complex ownership structures could be negatively impacted by stricter UBO identification rules in India. This could make it more difficult for these funds to invest in Indian companies.
Foreign asset managers with complex ownership structures: Foreign asset managers with complex ownership structures could be negatively impacted by stricter UBO identification rules in India. This could make it more difficult for these asset managers to invest in Indian companies.