P-Notes versus Sensex: With investments through P-Notes comprising around 11-12% of all FII investments in the stock markets, asking Sebi to do a thorough KYC can spook them.
It is just as well that the government has said that it will not be precipitate in taking action on the Special Investigative Team (SIT) on black money’s recommendations on P-Notes. With investments through P-Notes at around 11-12% of all FII investments in the stock markets, asking Sebi to do a thorough KYC can spook them and send the market crashing—it is only when Sebi shares such data with the taxman will it be possible to know if the money is being round-tripped from India. Monday’s collapse in the market—it ended 551 points down after falling 259 points on Friday—had more to do with the China collapse, but the P-Note issue also had a bearing. Sebi has tightened KYC norms, but it is not clear if this goes beyond the names of companies who are invested in P-Notes.
That is why the SIT has said Sebi needs to “come up with regulations where the ‘final beneficial owner’ of P-Notes/ODI are known … In no case should the KYC information end with name of a company … SEBI should have information of its promoters/directors who exercise effective control …”.
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The suspicion that a large part of P-Note investment may be Indian black money being round-tripped is an old one.
Indeed, the SIT report’s recommendations on P-Notes itself refers to a CBDT committee report of 2012. The fact that the Cayman Islands cannot possibly support the kind of investment that comes in from there—this has irked the SIT tremendously—is also well-known. But each time there has been any attempt to plug such loopholes, there has been an outflow of FII funds —that is also the reason why both this and the previous government have put off GAAR provisions for so many years on investments through countries like Mauritius, and that is why the Sebi banning of P-Notes was quickly reversed some years ago.
Launching a crusade against black money—with some highly doubtful numbers, it has to be added —is one thing, but dealing with its implications quite another. If the government is serious about tackling black money, it has to crack down on P-Notes and ensure Sebi gets full details of beneficial ownerships— and if Sebi does have details of beneficial ownerships as some officials claim, this needs to be shared with the taxman. Applying GAAR is also important to find out if FII flows are genuine. The problem, however, is that when other countries offer an easier tax regime, India has to play the same game by delaying GAAR and allowing P-Notes — in such a case, there is always the likelihood that Indian black money will find its way to such low-tax routes. But if tackling black money hits FII investments, the repercussions will be quite serious. As far as the government’s black money crusade is concerned, this is its rubber-meets-road moment.