Market regulator SEBI tightend the P-Notes yesterday and brought in more transparency in compliance with norms. The new rules will check misuse of P-Notes. These notes are securities issued by foriegn portfolio investors to overseas investors who aren't registered with the SEBI. The market regulator has made it mandatory on all end-users of these overseas instruments to follow anti-money laundering law in India and asked their issuers to report any suspected breach immediately. Pramod Gubbi, analyst with Ambit Capital, said the agenda seems to be towards bringing in more transparency in line with what the government has been doing to control black money. "To that extent some of these rules may put a curb on round-trippping that may be happening through this route."
He is positive that the new rules won't deter inflows into the country, but they will stop money of a 'different colour' coming in.
Beyond a short-term hit on the market, these rules won't have a lasting impact on the liquidity in the market, he added.
Below is the verbatim transcript of Pramod Gubbi’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: There are three or four rules that were changed in Participatory Notes (P-Notes). One, the guy who issues the P-Note now will be subject to Indian know your customer (KYC). Up until now it was either foreign or Indian KYC. Second, the guy who buys the P-Note; if it is widely held or if it is a sovereign wealth fund there are no problems but if the P-Note is held by a company which is owned more than 25 percent by one guy then that guy's KYC should be very clear, should be done appropriately by the P-Note issuer and then if there are inter se P-Notes sales; one guy holding a P-Note sells it to another guy he should take the consent of the guy who is writing the P-Note in the first place and then of course annually the guys who hold P-Notes have to come and reconfirm their trades. So, in a sense every year you are rechecking their addresses and know your customer details - that seems to be the broad set of rules. Have we understood right, these are the rule?
A: From what I understand the whole overarching agenda seems towards bringing in more transparency and again in line with what the government has been doing on various other aspects of controlling black money and unaccounted money. So, to that extent some of these rules might help, identify the end beneficiaries and put a curb on any sort of round-tripping that may have been happening through this route.
Sonia: What about in the very near term, do you think it could deter foreign investors from coming through the P-Note route only because it becomes bit more costlier know and more details will have to be given?
A: Possibly in the short-term, like I have maintained in the past, those genuine investors who come to India for long-term returns or even short-term returns based on the attractiveness of the market, a few basis points of cost because of compliance or JKYC shouldn’t deter that; maybe in the short-term as the administrative issues rise, there could be a dent but those will be transitory in nature.
However, those flows which were coming for different colours they might take a hit, which is not so bad to the market.
Latha: Immediately how should the market understand? Will liquidity be under threat because it appears that very widely held guys are not going to have a problem, right? Only the extra KYC is for P-Note holding entities which have over 25 percent owned by one guy. Will that mean a lot of guys will have to give KYC and they will therefore we bore of India?
A: I don’t think that will be the case. I think what you said earlier is right, that the majority of the segment is already abiding by the KYC rules. It is not like the P-Note issuers or jurisdictions are any less lenient KYC norms. To that extent most of that has been complied with already, most of that information should be with the issuers already, so that shouldn’t take a knock. It is only at the margin. Therefore, to that extent, beyond a short-term flow hit I won’t envisage any real impact on flows or liquidity in the market.
Latha: A heart attack today cannot be ruled out for the market?
A: Cannot be ruled out, nothing can be ruled at this stage.
Latha: On account of this?
A: I would be surprised if this is the reason. There are lots of things happening globally but I don’t think this should be one of the reasons which should contribute to any sort of a slump.
Sonia: You fleetingly mentioned it but that is the big trigger, the global cues and the kind of sell-off that we have seen in emerging markets. Do you expect that to continue and how should an investor wade through that?
A: It is something that we have been flagging as a risk for the past few months when the market bounced back. Our sense was the global cues never went away, it was perhaps kicked down the road and they are only emerging back again. So, to that extent I think those continue to be sort of tail risk for this market going through not just for the next few months but perhaps over the next year or so.
Latha: Approximately how much of P-Note guys may want to sell because of these rules? Will it fall by 10 percent-15 percent?
A: It is very difficult number. I am not sure how many would have information about the other issuers. I think Sebi is perhaps in the best position to give a number to this.
Latha: All jurisdictions have been moving in to tighten know your customer rules; therefore will be we seem as an outlier?
A: Not really I think this is a global concerted effort globally towards improving KYC norms and eliminating any sort of unaccounted or lack of transparency in capital markets. So, to that extent we are only moving in-line with the global strength other than being in an outlier here. However, from what I understand, alot of things that are already in place and like I said this impact will largely be at the margins if at all.
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