SEBI makes P-Notes less lucrative; seeking greater disclosure

SEBI in its board meet on thursday formalised several recommendations made by SIT (Special Investigation Team), in what can be termed as cleansing activity on SEBI's part. SIT was appointed by Supreme Court to address the issue of Black Money. 

Participatory Notes  (P-Notes), participants will now have to adhere to increased disclosure requirements and the there will be restrictions on transferring the P-Notes.

This is a major move as this will allow audit trail till the last end. The KYC norm for P-Notes will put lot of onus on the registered FPI (Foreign Portfolio Investor).

The current P-note regulation made it difficult for the regulator to identify the ultimate beneficiary. The registered FPI was not required to disclose the P-note subscriber details and hence it is argued that lot of black money (unaccounted money) flowed in Indian markets via P-Notes.  With new  know-your-customer (KYC) norms getting formalised the foreign investors will be at par with an Indian investor. There will be no 'address less funds' coming in India.

It's simple , when an Indian investor has to buy a single share he or she has to fill up several forms (KYC), submit PAN number and provide address proof,  etc., but for P-notes the FPIs issue them to funds and companies  whose identity is never known to the Indian authorities.

This move will also facilitate curbing round-tripping. Only last week India amended Tax Treaty with Mauritius to curb round-tripping of money. When money leave the country through different channels and gets back in the country via an investment in stock market (listed companies) it is nothing but round-tripping of money. This activity is hazardous as this may lead to abnormal rise in stock prices and genuine investors tend to loose most by such illegal activity.

The newly formalised norms will bring the P-note holder under the ambit of anti-money laundering norms as well as KYC norms. Setting up of a Financial Intelligence Unit (FIU) is formalised wherein  the registered FPI or issuer can alarm the FIU on any suspicious transaction. A periodic review on monthly basis is mandated for issuer with reports of complete transfer trail of Offshore derivative instruments (ODIs).

Few foreign funds have already confirmed of following the norms before being formalised by the SEBI, nevertheless now that the norms are formalised and documented there will be more clarity in functioning for the foreign investors.

Participatory Notes (PN) — is a general term used for the investment by Foreign Portfolio Investors (FPIs) through ODIs.