New Delhi, February 13, 2017

In a crackdown on alleged misuse of P-Notes for round-tripping, markets regulator Sebi has found five foreign funds to have issued these controversy- ridden offshore investment instruments to Indian nationals.

Besides, four registered foreign portfolio investors have issued Offshore Derivative Instruments (ODIs), commonly known as Participatory Notes or P-Notes to foreign nationals with "Indian sounding names" and Sebi has asked them to confirm if those individuals are NRIs or PIOs.

The regulator would take "suitable action" on receipt of details from the fund houses.

Following tightening of ODI norms by Sebi to check any misuse for round-tripping of funds, these instruments cannot be issued to Indians, NRIs or PIOs.

These instruments used to be very popular at one point of time among foreign investors who did not want to enter the market directly and used to invest through this route provided by registered FPIs.

However, consistent tightening of norms, including as per the suggestions of the Supreme Court-appointed Special Investigation Team (SIT) on Black Money has led to a sharp decline in its share -- from 56 per cent about ten years ago to less than 7 per cent of overall foreign portfolio investments in Indian markets currently.

Among others, Indian nationals were issued ODIs by the FPIs that are arms of some large global banks from the US, Switzerland and Australia. They have been asked by Sebi not to issue any fresh ODIs to such subscribers and square off the existing position on maturity or by December 31, 2020.

In a communication to the government on progress on detection of beneficial ownership information with regard to P-Notes, Sebi further said there are 10 ODI issuing FPIs which are yet to provide the beneficial owner details of their clients in the prescribed format.

"These FPIs have expressed their inability to provide the BO information," Sebi said, adding that they have been asked to provide the details by March 31, 2017. Till that time, they cannot issue any fresh ODI to existing clients, though they can issue such instruments to new clients after receipt of BO information as per Sebi norms.

As part of its efforts to tighten the norms for P-Notes, Sebi last year introduced a new KYC norms for such instruments and asked the FPIs to provide details in a new format for information about the end beneficial owner.

First such BO information, along with the complete ODI, was received by Sebi in November 2016, after which it carried an analysis of the submissions made by 38 ODI-issuing FPIs.

Consequently, Sebi has shared the progress report with the government along with its observations from the analysis.

In case of ODI subscribers where the percentage holding of beneficial owner was not provided, Sebi has asked those FPIs to provide the same at the earliest and would take "suitable action" consequently.

[The Economic Times]