The Securities and Exchange Board of India (Sebi) has tightened the norms for participatory notes (P-notes) in order to check misuse of these instruments in round-tripping and money laundering. Under the new regulations, offshore derivative instruments (ODIs) issuers need to adhere to the Indian know your customer (KYC) norms and the subscribers will have to take prior permission from the ODI issuer in case of transfer of the instruments to another offshore investor. The new regulations were approved Sebi on Thursday at a board meeting.
The decision comes after the Supreme Court-appointed special investigation team on black money had suggested last year that Sebi should further strengthen norms to keep a tab on beneficial ownership of P-Notes as they were widely used by foreign investors and could be prone to misuse.
Currently, ODI issuers follow KYC norms of either the jurisdiction of the end beneficial owner or the jurisdiction of the instrument issuer. The tweaked regulation will help in achieve uniformity as the KYC standards currently varied depending on the origin of the issuer or owner.
Under the new regulations, the ODI issuers will have to report all the transfers made among the instruments issued by them on a monthly basis to the regulator. Further, ODI issuers need to alert the Financial Intelligence Unit in case of any suspicious transaction.
Sebi had tweaked the P-note norms previously in 2014 when foreign portfolio investor (FPI) regulations were changed. Under the 2014 regulations, ODIs could be issued by or subscribed to only by appropriately regulated entities. Accordingly, foreign funds were divided into three groups based on their risk profile. Category-I FPIs, entities with the lowest risk, include foreign governments and government-related foreign investors. Category-II FPIs include appropriately regulated broad-based funds, university funds, and university-related endowments and pension funds, among others. Category-III FPIs include all others not eligible under the first two categories.
The contribution of P-notes to overall FPI inflows has come down significantly since the tighter norms came into effect.
P-notes currently account for about 10% of the total FPI inflows, against 50% in 2007.
In absolute terms, investments made through P-notes during March 2016 was `2.23 lakh crore, compared with `4.5 lakh crore in January 2007, Sebi data showed.
During the board meeting, the regulator also cleared the proposal of mandatory dividend distribution policy for the top 500 listed firms. These companies will now report the policy in their annual report.