The securities exchange board of India (SEBI) has proposed to tighten the rules for participatory notes and similar off-shore derivatives instruments (ODIs) by imposing regulatory fees on foreign portfolio investors for each such P-Notes issuance. P-Notes or participatory notes that are oversea derivative..
The securities exchange board of India (SEBI) has proposed to tighten the rules for participatory notes and similar off-shore derivatives instruments (ODIs) by imposing regulatory fees on foreign portfolio investors for each such P-Notes issuance.
What are P-Notes?
P-Notes or participatory notes that are oversea derivative instruments that have Indian stocks are their underlying assets. They allow foreign investors to invest in securities on Indian exchanging without registering themselves with the market regulators, SEBI.
WHY is SEBI calling for such move?
In a discussion paper, SEBI has proposed to bar p-notes. It has also anticipated levying regulatory fees of $1000 every three year on ODI subscriber. The fee is aimed at encouraging registration of FPIs. Implementation of regulatory fees would help the regulators keep a track of P-Notes Issuance and increasing the transparency and monitoring of process of ODIs. If the proposed norms are implemented, P-Note holders would be given time till December 31, 2020 to wind up existing positions.
The anonymous nature of the P-Notes makes it difficult for the regulators to keep a track of the investors. Further, there are evidences that they are being used for money laundering by the wealth Indians. Owing to this, P-notes have been perceived as a channel for black money.
Analysis
RBI have been pushing hard to curb on P-Notes, but the government appears to be reluctant to impose a full ban presumable because stock market would fall sharply with such a move and there would be a flight of capital as happened in 2007 p-notes crisis. In 2007, P-notes were banned for a while which accounted for 50% of the FII in India in 2007 due to hike in capital flow and excess liquidity. It leads market crash immediately- biggest intra-day crash in Indian stock market. The ban was removed later. In January 2011, new rules on FII made it mandatory to follow ‘Know your customer’ norm and submit the transaction details. In 2014, as a part of new rule FPIs has to submit their transaction report monthly disclosing their portfolios. Recently, SEBI has mandated the anti-money laundering rules (AML) applicable to all the P-Notes holders.
Last month, the government has barred all the Indian and Non-resident Indians from using P-notes to make investment in India. Restrict rules have led to decline in p-notes issuance from 50 percent in 2007 to just 6% at present.
Assessment
The ban of PNs has the capacity to erode the gains in the share market. PNs, as they provide route to high worth oversea individuals to enter Indian stock market anonymously lead to money laundering. Tax officials also fear that using this instrument enormous money launderers first take the money out of the country thorough Hawala route and get it back through p-notes. Terror financiers find this route more attractive and simple to convert their black money to white. Norms for investment into other unlisted sectors of the economy should be made easier in order to reduce p-notes issuances. PNs can shell danger for the domestic companies as an unknown entity is targeting it to gain the control.
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