HSBC to wind up P-note business in India

HSBC is among the top five issuers of P-notes in India with a market share of more than 6 per cent at the end of last financial year

 

HSBC is planning to wind up participatory notes (P-notes) operations in India, as tightening of regulatory framework has made the business unviable. P-notes’ attractiveness has been on the wane following tightening of the regulations and the recent double tax avoidance agreement (DTAA) with Mauritius.

HSBC is among the top five issuers of P-notes, or offshore derivative instruments, in India with a market share of more than 6 per cent at the end of last financial year. According to sources, the bank had set up an internal committee to study the developments around P-notes. The committee has suggested that incomes from P-note operations would decline in the next five years as the new norms have resulted in escalation of costs and regulatory burden.

 

“It is a part of HSBC’s global restructuring strategy to shut the business vertical, which doesn’t offer much growth potential. The bank has evaluated all the possible options on the table, including selling the P-note business. The decision to shut operations is in the best interest of the bank,” said a banker.

According to sources, the renegotiated DTAA with Mauritius has also impacted the P-notes business of HSBC, which is registered in Mauritius.

When asked, HSBC declined to comment on the issue.

Other P-note issuers are also revaluating their strategy due to the changed scenario. As per experts, all the major P-note issuers are losing their clients. On the other hand, registrations as foreign portfolio investors (FPIs) have seen a healthy increase. According to data from Securities and Exchanges Board of India (Sebi), there were 5,322 overseas funds registered as FPIs in July 2016, compared with 4,311 during the same period last year.

“Participatory notes are no longer the most attractive route for overseas funds. These days, P-note holders are opting for direct route as procedures for direct registrations have been simplified. Even in terms of disclosures, if these investors come to markets as category-I or category-II FPIs, they don’t have to disclose the end beneficiary while in case of P-notes they are required to disclose the same,” said Suresh Swamy, Partner, PwC.

Earlier this year, Sebi increased the Know Your Customer (KYC) requirements, issued curbs on transferability and prescribed more stringent reporting for P-notes issuers and holders. It also mandated issuers to follow domestic anti-money laundering laws (AML), instead of norms prevalent in the jurisdiction of the end beneficial owner.

As per the revised DTAA agreement, short-term capital gains would be charged on all the investments coming from Mauritius. The capital gains tax would be 15 per cent from April 2019. In order to facilitate smooth transition, government has proposed to tax the investments from Mauritius at 7.5 per cent until March 31, 2019.

Further, all the investments made prior to March 2017 would come under the “grandfathering” clause and would be exempt from paying any capital gains. Currently, the P-notes assets in the country are around Rs 2.1 lakh crore — 8.4 per cent of the total FPI assets. The share of P-notes in the overall FPI assets has been coming down due to tightening of disclosure related norms. In 2007, P-notes accounted for nearly half of the FPI assets.