Mumbai, January 20, 2017

SIT is constantly monitoring P-Notes data and is not very comfortable with current process of issue

Markets regulator Sebi plans to further tighten the regulations governing participatory notes amid persisting concerns that this route is being used for illicit fund flows.

Participatory Notes (P-Notes) are instruments issued by registered foreign portfolio investors (FPIs) to overseas entities who want to participate in the Indian market without being directly registered.

A senior Sebi official on Friday said the regulator is looking at further tightening the norms for P-Notes to address concerns raised by the Special Investigation Team (SIT) on black money.

SIT is constantly monitoring P-Notes data and is not very comfortable with the current process of issue and administration of the instruments, the official said.

In recent times, mixed trends have been witnessed in the flow of investments through P-Notes and the amount plunged to its lowest level in nearly three years to Rs 1.79 lakh crore at the end of November 2016.

Last year, the watchdog had put in place a stricter Know Your Client (KYC) and disclosure regime for P-Notes. The move was to ensure that it becomes tougher to use these offshore instruments without disclosing the money-trail and details of their users.

These changes were ushered in after taking into account suggestions made by the SIT to ensure that P-Notes route is not used for money laundering.

Currently, all users of P-Notes or Offshore Derivative Instruments (ODIs) are required to follow Indian KYC and AML (Anti Money Laundering) regulations, irrespective of their jurisdictions.

Besides, the issuers have to file suspicious transaction reports, if any, with the Indian Financial Intelligence Unit, in relation to the ODIs issued by them.

ODIs have often been in controversy in India for alleged misuse for round-tripping of funds. But the norms have been made stringent in the recent years, following which they have also become less attractive.

[The Business Standard]