OTP for off-market deals haunts FPI custodians

Mumbai: The Securities and Exchange Board of India is believed to have taken note of concerns expressed by market intermediaries catering to foreign portfolio investors (FPIs) who had sought exemption from OTP (One Time Password) and physical delivery rules for off-market securities transactions, which came into effect from November 1.Off-market transactions are ones where two interested parties agree to buy and sell securities bilaterally outside stock exchange platforms. SEBI didn't reply to ET's query.In August, the capital markets regulator put in place the new OTP mechanism for off-market transfer of securities through Depository Participants (DPs). The move was primarily aimed at safeguarding the interest of retail investors, keeping in view data privacy issues and to prevent unauthorised usage of the KYC information of FPIsGlobal institutional investors using the custodian setup to buy or sell securities locally are likely to face delays in executing transactions, dealers said, adding that there were already necessary checks and balances in place while processing any transaction.For institutional investors using a custodian, who is also the DP, the rule creates unintended challenges, particularly for foreign ones due to time zone differences, said Sriram Krishnan, managing director of Deutsche Bank. “We have provided our inputs in this regard and are very positive about these getting addressed,” he said.However, the proposed OTP mechanism “is a great initiative from the point of view of retail investors as it brings them greater security,” he added. The Sebi rules are targeted at accounts held with DPs. Besides the OTP mechanism, there is also a requirement to send physical/electronic Delivery Instruction Slips (DIS) for such transactions. Institutional clients typically maintaining accounts with a custodian are also impacted by this circular, dealers said.For instance, mutual funds, Alternative Investment Funds, and Foreign Venture Capital Investors (FVCIs) invest in unlisted securities that are generally transacted off-market. They will now have to adhere to the new OTP mechanism to complete a transaction. “The practical logistics challenge for clients in a completely different time zone is a real issue and needs to be addressed,” said Tejesh Chitlangi, partner, IC Universal Legal. “The potential delay in pledge authorisation may otherwise impact the trading pattern of such overseas investors,” he said.Each time an off-market transaction is initiated, an OTP is generated and sent to the client on the registered mobile number and email address. Unless the OTP is acknowledged and confirmed by the client to the Depository, the actual transfer of securities in the Depository system will not take place.The earlier norms permitting Power of Attorney-based based client account access to brokers for providing margins was prone to misuse and had prompted the regulator to prescribe added safety layers in the form of OTP-based client authorisations to confirm the pledge for margin purposes.In the case of foreign investors, the instructions are received via the globally used SWIFT platform .

from Economic Times https://ift.tt/3jSzGoh