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The special investigation team (SIT) on black money has asked the Securities and Exchange Board of India (Sebi) to furnish the details of all those investing through participatory notes (P-Notes), according to sources in the know.
This is the first time the government-constituted body has sought such massive amount of data, which includes the list of beneficial owners and transfer trials of investors taking the P-Note route to invest in domestic equity and debt markets.
The markets regulator, Sebi, which recently tightened the disclosure requirement for P-Notes, has already furnished the information to the SIT and the exercise would take a few more weeks to complete, sources added.
The SIT wants to ensure that the regulatory changes made by Sebi are sufficient to curb misuse of tools, particularly with respect to end beneficiaries.
The expert panel is concerned that the P-Note route could still be used by Indian companies to bring back unaccounted money, one of the officials who works closely with the SIT team has said. According to sources, the investigative team will examine the data provided by Sebi thoroughly as they suspect some links between the individuals linked to offshore companies floated by Panama law firm Mossack Fonseca.
P-Notes allow foreign investors to take exposure to Indian stocks without registering with Sebi.
These instruments are issued by foreign portfolio investors (FPIs) registered with Sebi. Early this year, Sebi had increased the know-your-customer (KYC) requirement, issued curbs on transferability, and prescribed more stringent reporting for P-Notes issuers and holders.
It also mandated issuers to follow Indian anti-money laundering laws instead of norms prevalent in the jurisdiction of the end beneficial owner.
The tightening of P-Note norms was triggered by the concerns raised by SIT in 2015, especially over the investment coming from Cayman Islands, the top destination for P-Note investors investing in the Indian securities market.
It was noticed that investment from Cayman was more than its population itself. “A major chunk of outstanding ODIs (offshore derivative instruments) invested in India – 31.31 per cent – are from Cayman Islands. This translates into roughly Rs 85,006 crore. Cayman Islands had a population of 54,397 in 2010, according to Wikipedia. It does not seem conceivable that a jurisdiction with a population of less than 55,000 could invest Rs 85,000 crore in one country. The main point of the above elaboration is just that it does not appear possible for the final beneficial owner of ODIs originating from Cayman Islands to be from that jurisdiction,” the SIT report had said.
Experts view this as a follow-up task by the government to ensure checks and balances. “The SIT may now want to follow up on whether the tightening is helping curb such practice,” said Suresh V Swamy, partner (tax & regulatory services), PwC.
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However, changes to the P-Note regime have blunted the advantage the instrument provided over direct investing through the foreign institutional investor route. “The government and the regulator are still concerned about round-tripping of money as there are some set of people who are adopting this route for illicit money transactions. But, this does not mean it is illegal or 100 per cent PNotes are like this. This is an internationally accepted route to invest money in various markets and there are many players who are genuine,” said R S Loona, managing partner, Alliance Corporate Lawyers.
Currently, the P-Note 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 FPI assets.
