New Delhi, February 9, 2017

Markets regulator Sebi has sought clarification from the Special Investigation Team, set up by Supreme Court to check black money, regarding stricter norms for Participatory Notes (P-notes) used by overseas investors.

SIT had recommended a slew of measures including the need for Sebi to come up with stricter regulations on P-notes or Offshore Derivative Instruments (ODIs), which are often viewed as a route for channelising illicit funds.

Sebi chief U K Sinha said the regulator is taking all steps to prevent any misuse of ODIs.

"One or two things based on SIT recommendations have been already implemented by us. There are some issues on one or two points, for which we have written to them," he told PTI.

Suggesting there may be a change in rules governing P-notes, Sinha said that Sebi was in "advance stage of discussion" with the SIT on the issue of misuse of P-notes.

"We are regulating them. That is why the number (investments via P-notes) has come down. We will do whatever SIT asks us to do on it," said the chairman of Securities and Exchange Board of India (Sebi).

P-notes are popular among foreign investors since they allow these investors to earn returns on investment in the Indian market without undergoing the significant cost and time implications of directly investing in the India.

These instruments are traded overseas outside the direct purview of the Sebi surveillance thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these instruments.

Concerns have been raised that some of the money coming into the market via P-notes could be the unaccounted wealth camouflaged under the guise of Foreign Institutional Investor (FII) investment, as per the Finance Ministry report.

Sebi on its part has been taking measures to ensure that P-notes are not used as conduits for black money or terrorist funding.

The markets regulator had earlier informed that the top five locations of end beneficial owner of ODIs were Cayman Islands, USA, UK, Mauritius and Bermuda.

According to Sebi data, the total value of P-notes investments in Indian markets plunged to Rs 1,57,306 crore in December-end from Rs 1,79,648 crore at the end of November.

The SIT, in its their report, had recommended that the information of beneficial owner with Sebi should be in form of individual whose Know Your Customer (KYC) information is known to the regulator.

"In no case should the KYC information end with name of a company. In case a company is the holder of P-notes/ODIs, Sebi should have information of its promoters/directors who exercise effective control over the company," it had said.

It is clear that obtaining information on beneficial ownership of P-notes is of crucial importance to prevent their misuse. Sebi needs to examine these issues and come up with regulations where the final beneficial owner of P-notes/ODIs are known, the SIT had recommended.
(REOPEN DCM 101)

Later speaking to reporters at the 11th Digital India the Sebi Chief said that over a period of time, the percentage of P-notes compared to royal foreign portfolio investments has been going down.

Besides, some of the large funds, who were leader in this area, have been forced to close down their business

"Its a good development. One of the reason for such development could be Sebi came out with norms in 2014 and the SIT made certain recommendations and we have implemented most of them," he said.

"In some of the recommendations, we have communicated our point to the committee and they have some sought data, obviously we have to be guided by whatever SIT decides finally," he added.

[The Business Standard]