Amidst fears of a negative fallout of the Special Investigative Team’s (SIT) recommendation of stricter norms for participatory notes (P-notes) on markets, experts on regulations pertaining to capital markets said the issue will not have a major impact on the Indian market.
The government clarified consultations will be held with the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and other stakeholders on the SIT recommendations.
According to Kaushik Mukherjee, partner, J Sagar Associates law firm, introducing multiple checks and balances, and forcing compliance down the throat of persons who otherwise undertake no legal compliance in India, it may discourage legitimate global investors from investing in Indian securities through such structures.
“Sebi has already prohibited the issuance of P-Notes by way of opaque structures. In all, I am of the view that there may be enough there already by way of regulation. As far as multi layered structures are concerned, an Indian regulator’s extraterritorial jurisdiction in relation to regulating such transactions is questionable,” Mukherjee said.
UR Bhat, MD, Dalton Capital Advisors, that advises a number of FPI clients, is of the view that P-Notes issue will not have a huge bearing on foreign investors. “Currently, there are adequate norms in place to know the final beneficial ownership of P-Notes. Most investors opt for P-Notes for convenience, in the absence of clarity on taxation involving FIIs,” Bhat said.
The Supreme Court-appointed SIT on black money last week recommended a host of measures, including tightening norms related to participatory notes investments into India.
“These are the recommendations given by SIT. We will take views after consultation with stakeholders including Sebi, RBI and related institution. Government will take a considered decision, there is no decision so far,” revenue secretary Shaktikanta Das said here.
Participatory Notes or P-Notes are instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator.
The SIT had suggested the Securities and Exchange Board of India (Sebi) put in place regulations to help identify individuals holding participatory notes or offshore derivative instruments (ODIs), and take other steps required to curb black money and tax evasion through the stock market route.
A similar recommendation made in 2007 had triggered a major collapse in the stock market, prompting the then finance minister P Chidambaram to announce that no such measures would be taken.