SEBI
Sebi chief sells India story to Silicon Valley investors. Pictured: The logo of the Securities and Exchange Board of India (SEBI), India's market regulator, is seen on the facade of its head office building in Mumbai, India, July 13, 2015.Reuters File

At Rs. 2.2 lakh crore making up about 10 percent of total foreign investment inflows, participatory notes (P-Notes) will henceforth face tougher laws before making entry into India's capital market, as reported by Press Trust of India. The Securities and Exchange Board of India (Sebi) extended its stringent domestic requirements of Know Your Client (KYC) and anti-money laundering norms to both issuers and subscribers of all offshore derivative instruments (ODIs) including P-Notes.

P-Notes are derivative instruments of investment issued by registered foreign portfolio investors (FPIs) to overseas investors to help them trade in Indian stocks without registering themselves directly in India. Its attractiveness was driven by its cost effectiveness, easy accessibility to the Indian stock market, the PTI report noted.

The Economic Times cited Richie Sancheti, a partner at the law firm of Nishith Desai Associate, as saying that "A large part of the target audience, which was subscribing to ODIs and P-Notes, were already in compliance with some of the rules that SEBI has just formalised as of now."

According to the new norms, ODI issuers will now have to identify and verify the beneficial owners in the subscriber entities, specifically those who hold more than 25 percent and 15 percent threshold in companies or partnership firms/trusts/unincorporated bodies, respectively, reported the Business Standard. The issuers will also have to identify and verify the persons who control the operations of these entities.

In addition, the ODI subscribers will also have to seek prior permission of the of the original ODI issuer for transfer of ODIs. The issuers, on the other hand, will have to register details of all intermediate transfers during the month and report the same to Sebi in the prescribed monthly report. In a preemptive move, the issuers are also assigned to file suspicious transaction reports with the Indian Financial Intelligence Unit on the ODIs issued by them, while they also carry out reconfirmation of the ODI positions on a semi-annual basis.

In the heydays of 2007, P-Notes contributed to as high as 55 percent of the total foreign inflows into the Indian capital market. However, it also consistently raised concerns of black money and unwanted wealth flowing in from unidentified persons into the domestic capital markets.

Experts pointed out that the tightening of norms might trigger a short-term impact on the flows, but may help curb the flow of black money into the Indian equity market.

Pavan Kumar Vijay, the founder of Corporate Professionals, said: "Simultaneously, Sebi should reduce paper work for investors and provide online facilities for investment. While an Aadhaar card may be the link for Indian Investors, a onetime registration for FIIs with a unique number may be introduced."

The Special Investigation Team (SIT) on black money set up by the government had suggested Sebi to further strengthen norms with regard to P-Notes to keep a check on its beneficial ownership. It noted that these were widely used by overseas investors and were open to misuse.