The government on Monday sought to comfort nervous investors saying that no “knee-jerk reaction” could be expected from the policymakers to the black money special investigation team’s (SIT) call for tighter regulation of participatory notes (P-notes), a derivative instrument that non-residents use to invest in Indian markets.
“It is too early to say what view the government would take. But it will certainly not make any a knee-jerk reaction, particularly one that can have any adverse impact on investment environment,” finance minister Arun Jaitley told reporters at his Parliament House office, adding that the policy response would be a well-considered one.
Speaking on the same lines, revenue secretary Shaktikanta Das said there was no need for market participants to prejudge which way the government would decide (on the issue of P-notes).
Fears of tighter regulation in the wake of the SIT’s suggestion that the Securities and Exchange Board of India should frame regulations to access the beneficial ownership details of P-notes issued by foreign portfolio investors (FPIs) to their overseas clients is seen by analysts as one of the trigger’s for Monday’s fall in market indices.
The sell-off in other Asian markets too led to the decline.
The SIT led by justice MB Shah recommended better regulatory oversight saying Sebi does not have information about the ultimate beneficial owner of these transferable instruments, making it prone to be abused for round-tripping of tax-evaded funds back to India.
The investigation team also argued that the Cayman Islands, which had a population of 54,000 in 2010, accounted for 31% of all inflows from offshore derivative instruments, accounting for about Rs 85,000 crore, which appeared inconceivable. Sebi regulations stipulate that P-notes cannot be issued to resident or non-resident Indians. As per the current framework, FPIs issuing P-notes ought to be regulated by the appropriate regulator on their home soil subject to ‘know your client’ norms. They are also needed to submit subscriber information to Sebi. The SIT said Sebi needs to know the ultimate individual beneficial owners of these transferable instruments.
Das said there was no need to “panic” about the government’s policy response to these suggestions, which would be made in due course only after extensive consultations with Sebi, the Reserve Bank of India, other institutions and stakeholders. Das told FE that effectively checking abusive practices in the market without unnerving genuine investors was one of the challenges in financial regulation.
The share of P-notes, which used to account for about half of the total foreign portfolio investment into India in 2007, had gradually declined after Sebi tightened disclosure norms. It now accounts for about 15-20% of the total FII investment in India.