Sebi clears stricter P-Note norms to curb black money flow

Bolstering steps to curb any flow of illicit funds in markets, Sebi today decided to bar resident as well as non-resident Indians from making investments through participatory notes.

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."

Following Sebi's measures to check any misuse of P-Notes, the notional value of these instruments has declined over the years from 55.7 per cent of overall FPI investments in June 2007 to just 6.7 per cent in December 2016.

In recent months, the P-Note investments have fallen further though there was a surprise uptick in March -- presumably due to this being the last month for availing of certain tax benefits for investments coming through some major offshore investment gateways.

There are also fears that the P-Note investments may start coming from other jurisdictions like the US, France and the Netherlands after tightening of rules for inflows from countries like Mauritius, Singapore and Cyprus.