Capital markets watchdog Sebi tightens P-Note norms to curb money laundering

Acting upon recommendations of the Supreme Court-appointed Special Investigation Team on black money, Sebi tightened the due diligence requirements for issuance and transfer of controversy-ridden P-Notes and put the onus on investors to ensure the AML compliance.

 The issuers would have to conduct periodic review and report the complete transfer trail of Offshore Derivative Instruments (ODIs) -- commonly known as Participatory Notes or P-Notes -- to Sebi on a monthly basis in addition to the present requirement of reporting details of their holders.

Any change in P-Note regulations often results in a significant impact on the markets. As a Sebi board meeting was on today, markets plunged sharply on anticipation of tightening of the norms. After the meeting here today, Sebi said its board has approved additional measures for the purpose of enhancing the transferability and control over the issuance of ODIs. 

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. Total investment through ODIs stood at Rs 2.2 lakh crore at the end of March 2016.

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. 

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 decided to put in place additional safeguards as suggested by the SIT. 

The SIT last year had suggested that Sebi should further strengthen its norms to keep a tab on beneficial ownership of P-Notes as these are widely used by foreign investors and could be prone to misuse. Sebi said its Board took note of the measures taken by the regulator for tightening the eligibility and investment norms for ODI issuers and subscribers for the past few years.

Under the existing norms, an ODI subscriber cannot be a resident in a country with an inadequate framework for compliance to the global standards for Anti-Money Laundering or Combating the Financing of Terrorism Regulations. Besides, ODI subscribers are not permitted to have an Opaque Structure -- meaning any structure such as protected cell company, segregated cell company or equivalent, where the details of the ultimate beneficial owners are not accessible.