Sebi looks to further tighten the noose around participatory notes

Complete ban on use of derivatives; will be made to furnish granular disclosures

The Securities and Exchange Board of India (Sebi) is looking to further tighten the noose around participatory notes (p-notes) or offshore derivatives instruments (ODIs) by imposing a complete ban from using the derivatives market.

Currently, p-notes can use the derivatives market only for hedging purposes.

Further, the market regulator has proposed mandating p-notes — and also foreign portfolio investors (FPIs) with segregated portfolios — to provide granular disclosures around their ultimate beneficial owners (BOs), which currently only FPIs have to provide.

The move is to plug the regulatory arbitrage that exists between those taking the p-note and segregated portfolio route vis-à-vis the regulator FPI route.

 

Also, it will address concerns around multiple levels of leverage during use of derivatives by ODIs, even though only for hedging purposes.

 

Sources said the ban on derivatives, if implemented, could impact outstanding investments worth Rs 3,000 crore.

The regulator has proposed that existing derivatives exposure of p-notes will be required to be redeemed within a year once these proposed norms are made effective.

In a discussion paper, Sebi has said that in recent years it observed that several FPIs had high exposure to a single company or a group.

The regulator said it has raised concerns of possible misuse of the FPI route to circumvent regulatory requirements such as the 25 per cent minimum public shareholding or preventing the open offer trigger.

To address this issue, Sebi in August 2023 made additional disclosures for FPIs with over 50 per cent of their equity holdings in a single group.

However, this requirement is not applicable to p-notes.

“This enables a foreign investor to potentially get around the granular disclosure obligations by taking exposure through the ODI route,” Sebi has said in a paper.

Similarly, FPIs that operate segregated portfolios also enjoy similar regulatory arbitrage as under the August circular, the concentration criteria and disclosure requirements in case of breach of concentration criteria are applied at the fund level and not at each segregated portfolio level.

The regulator has proposed that the disclosure requirements specified under the August circular be made applicable directly to p-notes and segregated portfolios of FPIs.

P-notes are used by overseas funds who want exposure to the Indian markets, without going through the complexities of direct registration with Sebi.

Prior to 2008, this route was very popular among foreign investors with as much as half of the inflows into the Indian markets coming through the p-note route.

However, the regulatory tightening over the years took a toll on their popularity.

As of May 2024, less than 2 per cent of outstanding FPI assets came through this route.


Regulator issues Rs 25 crore notice to Karvy Stock Broking, Parthasarathy 

The Securities and Exchange Board of India (Sebi) on Wednesday sent a notice to Karvy Stock Broking Ltd (KSBL) and its CMD C Parth­asarathy asking them to pay around Rs 25 crore within 15 days in a case pertaining to misappropriation of clients’ funds by misusing the Power of Attorney. The notice came after they failed to pay the fine imposed on them by Sebi.
 

Sebi in April 2023 barred KSBL and Part­h­asarathy from the securities market for seven years and also imposed a penalty of Rs 21 crore on them for misappropriating clients’ funds by misusing the Power of Attorney given to the broking firm. Individually, the regulator had levied a fine of Rs 13 crore on KSBL and Rs 8 crore on Parthasarathy, promoter-cum-managing director. In its fresh notice, Sebi has told KSBL and Parthasarathy to pay Rs 15.21 crore and Rs 9.36 crore, respectively, which inc­l­udes interest and recovery cost, within 15 days.  

In the event of non-payment of dues, the markets regulator will recover the amount by attaching bank accounts, attaching as well as selling the entities' moveable and immoveable property. Besides, Parthasarathy may face "arrest and detention in prison".

(With inputs from PTI)