SEBI keen on P-notes; will tighten norms further if SIT so wants

Tarun SharmaMoneycontrolThe Securities and Exchange Board of India is keen on continuing with participatory notes, a senior official of the regulator told a group of reporters on the sidelines of a public event.Participatory notes are derivative instruments with equities/debt as the underlying. They are favoured by overseas investors who want to have an exposure to Indian securities—mostly shares—without registering with SEBI for reasons genuine or dubious.However, P-notes, as they are called in market parlance, have attracted a lot of scrutiny by agencies over the years. That is because they have been widely used for money laundering, and in many cases the identity of the beneficial owners is screened by a layer of intermediaries. The white paper on black money released during UPA-II’s regime also mentioned P-notes as one of the conduiys for money laundering.In May last year, SEBI had tightened disclosure norms for P-notes to be able to know the beneficial owners of these instruments at any point of time. As of November 2016, the value of P-notes with equity as the underlying was around Rs 1.14 trillion and account for 7.5 percent of all assets (equity + debt) owned by foreign institutional investors. At one point in 2007, the proportion was as high as 50 percent.Foreign institutional investor (FII) investments through P-notes have been steadily declining over the years as regulations got stricter.In October last year, the Special Investigating Team (SIT) appointed by the Supreme Court (SC) asked SEBI to furnish the details of all those investing through P-Notes, including the list of beneficial owners and transfers among P-note clients. The SEBI official said it has told SIT that P-note rules could be tightened further if the agency was not convinced that the present safeguards were adequate. Sources say the SIT is of the view that there are loopholes that can still be exploited.In an interview to CNBC-TV18 last week, Former RBI Governor YV Reddy said that the fight against black money was incomplete till there was a total ban on P-notes.“It is very important because of two things, first the black money fight inside is one thing, black money which goes outside and comes back is another type of black money-round tripping and it is not cash, it is going through the financial system,” Reddy had said.“You don't take millions of dollar cash in suitcase and put it in bank in Switzerland, it has to be through financial system,” he said.