SEBI to ban Indians from investing via P-notes

In a decision, which is to come post SEBI's board meeting on April 26, 2017, the market regulator is likely to ban Indians, non-resident Indians and institutions beneficially owned by NRIs from investing through participatory notes.

The decision is expected to come in an attempt to put a cap on the round-tripping of funds by Indians to evade taxes. Often the money sent out of the economy by inflating import bills and under reporting export income is channeled back to its owners through p-note investments in stocks, as most foreign investors investing in p-notes are fronts for Indian and NRI entities or the onward issuance of p-notes provides a layer of shield to camouflage the actual beneficiary.

Till now, 'frequently asked questions' on the regulator’s website restricted Indians and NRIs from benefitting from PNs, however, a proper inclusion of the regulations in FPI rules will enable the market regulator to keep a check on the transactions, with greater legal sanctity.

At present, nearly USD 27 billion of foreign investment comes through p-notes, thus it is a huge challenge for SEBI to keep a watch on each p-note issued.