Acting upon recommendations of the Special Investigation Team on black money, market watchdog Sebi plans to tighten due diligence requirements for issuance and transfer of controversy-ridden P-Notes and put the onus on investors to ensure compliance with anti-money laundering law.
While Sebi (Securities and Exchange Board of India) has been of the view that the regulations have already been strengthened to check any misuse of this route for money laundering like activities, it has decided to put in place additional safeguards as suggested by the SIT.
The regulator plans to put in place six specific changes to the KYC (Know Your Client) norms and transferability of Offshore Derivative Instruments (ODIs) — commonly known as Participatory Notes or P-Notes — in this regard.
The proposed changes have been finalised after discussing with concerned stakeholders including some major issuers of P-Notes and they have broadly agreed to the suggested measures in the interest of the markets, a senior official said.
These include mandating the issuers of P-Notes to file Suspicious Transaction Reports (STRs), if any, with the Indian Financial Intelligence Unit (FIU) in relation to the ODIs issued by them.
On the KYC norms, while current regulations also mandate that ODIs can be issued only after compliance to the KYC requirements, the issuer entities have been adopting either the Indian AML (Anti Money Laundering) norms, norms in the jurisdiction of the issuer or the norms in the jurisdiction of the end beneficial owner or the ODI subscriber.
As per the proposal, Indian AML norms would need to be followed by issuer entities for carrying out customer due diligence of the ODI subscribers.
Officials said the regulations have been very robust to check any misuse of P-Notes and the proposed changes might not affect the flow of funds in a big way as they are mostly procedural in nature and do not drastically change the regulatory framework.
P-Notes are typically instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the domestic stock markets without registering themselves directly in India, but still need to go through a proper due diligence process.
P-Notes make up for about 10-12 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 Supreme Court appointed SIT on black money last year had suggested that Sebi should further strengthen its 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.