Sebi tightens P-Note norms for hawk-eye vigil on black money

Tightening its norms to check any misuse of P-Notes for laundering of black money, Sebi today made it mandatory for users of these controversy-ridden overseas instruments to follow Indian anti-money laundering law and report any suspicious transactions immediately.
Acting upon recommendations of the Supreme Court- appointed Special Investigation Team on black money, Sebi also tightened the due-diligence requirements for issuance and transfer of these instruments and put the onus on the original issuer for compliance to Anti-Money Laundering Regulations.
The issuers would have to conduct periodic review and report the complete transfer trail of Offshore Derivative Instruments (ODIs) -- commonly known as Participatory Notes or P-Notes -- to Sebi on a monthly basis in addition to the present requirement of reporting details of their holders.

P-Notes are typically instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in Indian markets without registering themselves directly in India to save on time. But, they still need to go through a proper due diligence process.
At about Rs 2.2 lakh crore, P-Notes now make up for about 10 per cent of total foreign investment inflows into Indian markets, as against over 55 per cent at the peak of stock market bull run in 2007.
Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies.

The SIT on black money last year had suggested that Sebi should further strengthen its norms to keep a tab on beneficial ownership of P-Notes as they were widely used by foreign investors and could be prone to misuse.

As the new rules regarding P-Notes was being discussed by the Sebi board today, the stock market plunged sharply on anticipation of tightening of the norms.
After the meeting here today, Sebi said its board has approved additional measures for the purpose of enhancing the transferability and control over the issuance of ODIs.
Sebi Chairman U K Sinha said the foreign investors have been "persuaded" with regard to the new changes and they are "willing to accommodate" on proposals made by the regulator.

Advisory firm Corporate Professionals' Founder Pavan Vijay said Sebi would be able to "keep a penetrating eye on the investors and check the flow of black money and unwanted money from unknown persons in the Indian stock markets".
"Though this stringent rule may have short-term effect on the capital market, it would be a boon for honest investors and FIIs and market as a whole in the long run," he said, while suggesting that Sebi should also reduce the paper work for investors and provide online facilities for investment.
"While Aadhaar Card may be the link for Indian Investors, a onetime registration for FIIs with a unique number may be introduced," he added.

Sebi's board also approved a simpler set of norms for settlement and compounding of cases, as also a proposal to make it mandatory for top-500 listed companies to have a dividend distribution policy for their investors.
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While Sebi (Securities and Exchange Board of India) has been of the view that the regulations have already been strengthened to check any misuse of P-Note route for money laundering like activities, it decided to put in place additional safeguards after recommendations from the SIT.
Sebi said its Board took note of the measures taken by the regulator for tightening the eligibility and investment norms for ODI issuers and subscribers for the past few years.

Under the existing norms, an ODI subscriber cannot be a resident in a country with an inadequate framework for compliance to the global standards for Anti-Money Laundering or Combating the Financing of Terrorism Regulations.
Besides, ODI subscribers are not permitted to have a Opaque Structure -- such as a protected cell company where details of the ultimate beneficial owners are not accessible.
NRIs and Resident Indians are also not permitted to transact in ODIs.
Presently, the ODI issuers follow the KYC/AML norms of either the jurisdiction of the end beneficial owner or of the jurisdiction of the ODI issuer.
In order to bring about an uniformity in the KYC/AML norms, it has been decided that Indian norms will now be applicable to all ODI issuers. These norms will be the same as that applicable for all other domestic investors.

Also, ODI Issuers will be required to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the applicable threshold -- 25 per cent in case of a company and 15 per cent in case of partnership firms, trusts or unincorporated bodies.
In such cases, the ODI issuers will need to identify and verify the persons who control operations of these entities.
As per existing regulations, ODI subscribers are not required to take prior permission of the issuer for transfer of ODIs to another investor offshore.
In order to tighten the ODI regime and have more control over issuance and transfer of ODIs, it has been decided that the ODI subscribers will have to seek prior permission of the original ODI issuer for further or onward issuance, as also for transfer of ODIs.

On KYC review, Sebi said it needs to be done on the basis of the risk criteria -- at the time of on-boarding and once every three years for low-risk clients and at the time of on-boarding and every year for all other clients.
On filing of Suspicious Transactions Reports (STRs), Sebi said ODI Issuers would need to file suspicious transaction reports, if any, with the Indian Financial Intelligence Unit (FIU), in relation to the ODIs issued by them.
The ODI Issuers would also be required to carry out reconfirmation of the ODI positions on a semi-annual basis.
On periodic operational evaluation, Sebi said ODI Issuers would need to put in place necessary systems and carry out a periodical review and evaluation of its controls, systems and procedures with respect to the ODIs.

The changes have been finalised after discussing with concerned stakeholders including some major issuers of P-Notes and they have broadly agreed to the suggested measures in the interest of the markets.