 "FPIs domiciled at GIFT City allowed to issue P-notes to investors")
Foreign portfolio investors (FPIs) domiciled at the GIFT International Financial Services Centre (IFSC) and registered with the Securities and Exchange Board of India (Sebi) have been allowed to issue offshore derivative instruments (ODIs), popularly known as participatory notes (pnotes).
At present, the International Financial Services Centre Authority (IFSCA), the unified regulator for GIFT City, allows banking units to issue pnotes.
“As a first phase, the authority had permitted IFSC banking units, registered with Sebi as FPIs, to issue derivative instruments with Indian securities as underlying...As a second phase, it has now been decided to permit IFSCA-registered non-bank entities, registered with Sebi as FPIs, to issue derivative instruments with Indian securities as underlying, in GIFT-IFSC,” an IFSCA said in a circular.
Market experts said allowing pnote issuance from GIFT City could once again boost their appeal, provided rules around taxations are also eased.
“In addition to offshore bank units investing in securities in Indian stock exchanges, other entities that invest in listed markets are mainly the funds in IFSC registered as FPIs.
While the IFSCA has allowed issuance of ODIs by all such IFSC entities, to non-resident investors, related changes in tax laws would be required to extend the exemption for investors from Indian taxation. When the banking units were allowed to issue ODIs last year, there was a spike in overall ODI issuance as a percentage of aggregate investments by FPIs. ODI issuance will get a further boost with all other investors from IFSC being allowed to issue ODIs,” said Sunil Gidwani, partner, Nangia Andersen.
He called for an exemption of capital gains on transfer of ODIs by the non-resident investors as well as for any distribution by ODI issuers.
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Currently, about 46 FPIs are domiciled at the GIFT IFSC. Experts believe some of the relatively-large ones will start issuing pnotes.
“This presents a significant opportunity for non-banking FPIs located at the IFSC with substantial assets under custody (AUC) to offer ODIs to international investors. ODIs provide a major benefit of confidentiality to investors, which is highly appealing to many. When combined with the leverage permitted at the GIFT City, ODIs create a compelling argument for an increase in trading volume among GIFT City FPIs,” said Neha Malviya Kulkarni, chief growth officer, SuperNAV.
Experts say issuance of pnotes will not just be restricted to FPIs but will also extend to alternative investment funds (AIFs).
“Even AIFs who have an FPI registration can issue ODIs. Issuance of the ODI enables the FPI to hedge their risk and enables the holders of such ODIs to get the benefit of exposure to Indian equities and instruments,” said Leena Chacko, partner, Cyril Amarchand Mangaldas.
Experts said recent regulatory changes could give a fillip to FPI activity from the GIFT City. This week, Sebi allowed non-resident Indians to own up to 100 per cent of FPIs registered at GIFT City.
Last year’s Budget recognised ODIs issued by FPI at the IFSC by amending Section 18A of the Securities Contracts (Regulation) Act, 1956.
“While these developments bring optimism, clarity on the tax implications for investors will be needed. As GIFT-IFSC continues to evolve as a premier financial hub, this move sets the stage for innovation and growth in India's financial sector,” said Suresh Swamy, partner, Price Waterhouse & Co.
Pnotes are investment vehicles used by overseas investors to gain exposure to the domestic markets without registering with local regulators. They were of immense popularity prior to 2007 when nearly half of the foreign flows came through this route.
However, they lost their appeal following tightening of norms around identification of their end beneficiaries and easing of FPI registration norms. Currently, pnotes account for around 2 per cent of the total AUC of FPIs.
