With Sebi tightening the norms, investments through the participatory notes route will become more expensive, say analysts.
Acting upon recommendations of the Supreme Court-appointed Special Investigation Team on black money, Sebi has tightened the due diligence requirements for issuance and transfer of controversy-ridden P-Notes and put the onus on investors to ensure the Anti-Money Laundering compliance.
Now, it would be mandatory for all end-users of P-Notes to follow anti-money laundering law in India and asked their issuers to report any suspected breach immediately.
“The new norms are in line with suggestions made by the SIT in its July 2015 report. These changes will not only make the route difficult to access India market but also make it more expensive,” Suresh Swamy, who is Partner Tax & Regulatory (Financial Services) at PwC India said.
ODI issuers would have to put in place a robust mechanism to track end beneficial owner, he added.
Among others, Sebi has said that P-Note issuers would have to conduct periodic review and report the complete to Sebi on a monthly basis in addition to the present requirement of reporting details of their holders.
After the meeting in New Delhi, Sebi said its board has approved additional measures for the purpose of enhancing the transferability and control over the issuance of ODIs.
Corporate Professionals Founder Pavan Kumar Vijay said though this stringent rule may have short-term effect on the capital market, it would be a boon for honest investors and FIIs and market as a whole in the long run.
Recently, major foreign investors including JPMorgan, HSBC, UBS and Goldman Sachs supported provisions for immediate reporting of any breach to the regulator and filing of suspicious transaction reports related to P-Notes.
However, they had also opined that introduction of any further control measures is unlikely to be “resource effective” as the regulatory requirements in India are already more stringent than other jurisdictions globally for P-Notes.
P-Notes now make up for about 10 per cent of the total FII inflows as against over 50 per cent at the peak of stock market bull run in 2007. Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies.
The total outstanding investment through ODIs stood at over Rs 2.2 lakh crore at the end of March 2016.