Sebi's stricter P-Note norms to curb black money in markets

P-Notes have been associated with round-tripping of domestic black money back into Indian economy

In yet another move in India against black money, markets regulator Sebi on Wednesday barred resident as well as non-resident Indians (NRIs) from making investments through participatory notes (P-Notes).

"An express provision shall be inserted in the regulations to prevent resident Indians/NRIs or the entities which are beneficially owned by resident Indians/NRIs from subscribing to Offshore Derivative Instruments (ODIs)," the Securities and Exchange Board of India said in a statement here regarding ODIs, which are commonly known as participatory notes.

P-notes are mostly used by overseas individual investors, hedge funds and foreign institutions to invest in the Indian securities markets through registered foreign institutional investors (FIIs).

This investment instrument constitutes a major portion of the total FIIs' investments into the key domestic indices.

P-Notes have also been associated with 'round-tripping' of domestic black money back into the Indian economy.

Queried by reporters here following a meeting of the Sebi Board on whether there are fears that NRIs might be investing through P-Notes route, Chairman Ajay Tyagi replied: "I don't think there is any fear of that."

"The intention all along was not to allow them and that was not clearly reflected in the regulations, only through FAQ. And so it is being clarified through regulations."

The decision is part of efforts to strengthen the regulatory framework for offshore derivative instruments (ODIs), commonly known as participatory notes (P-Notes), which have been long seen as being possibly misused for routing of black money from abroad.

While there are directions for NRIs and resident investors that bar them from using P-Notes in the form of frequently asked questions (FAQs), the Sebi board has now approved having a new provision in the regulations.

There was a view that the existing restrictions are only in the form of 'FAQs' and therefore the Finance Ministry has asked the regulator to impose this restriction through an amendment in the norms in order to give greater legal sanctity.

The Sebi board meeting with Ajay Tyagi as its chair for the first time has approved introducing a new provision in the FPI regulations whereby NRIs will be barred from investing in the Indian capital market through ODIs.

"An express provision shall be inserted in the regulations to prevent resident Indians/NRIs or the entities which are beneficially owned by resident Indians/NRIs from subscribing to ODIs," the regulator said in a release issued after the board meeting here.

In this regard, the Sebi (foreign portfolio investor) Regulations, 2014, will be amended.

Asked whether there are fears that NRIs might be investing through P-Notes route, Tyagi said: "I don't think there is any fear of that... The intention all along was not to allow them and that was not clearly reflected in the regulations, only through FAQ. And so it (is being) clarified through regulations."

Lately, Sebi has announced stringent norms for the use of P-notes, making it mandatory for all P-note users to follow the anti-money laundering law and report any suspected breach immediately.

Following the Sebi measures, participatory notes-based investments in the Indian securities market continued their downtrend last year, plunging by 12.43 per cent to Rs 1.57 lakh crore in December 2016 from Rs 1.79 lakh crore reported for the previous month.

December's P-notes tally was the lowest investment level made through the investment instrument since July, 2013, when the total investment value through P-notes stood at Rs 148,188 crore.