P-Note issuers on board with respect to Sebi KYC norms: Govt

A day after Sebi tightened norms for investment in capital market through P-notes, government on Friday said the 37 issuers of the offshore instrument have been sensitised about the provisions and all of them are on board. Tightening its norms to check misuse of P-Notes for laundering of black money, market regulator Sebi had on Thursday made it mandatory for users of these controversy-ridden overseas derivative instruments to follow Indian anti-money laundering law and report any suspicious transactions immediately.

"All the P-Note issuers have been sensitised about the requirement. They are fully on board. There are about 37 P-Note issuers. Almost all of them are on board," Economic Affairs Secretary Shaktikanta Das told reporters here. Sebi, he said, has only asked that KYC should be as per India onshore KYC (Know Your Client) that is because the investment instrument emanates from many countries "where the KYC mechanism is pretty relaxed".

P-Notes (Offshore Derivative Instruments-ODIs) account for only 10 per cent of assets under custody of FPIs now, compared to 56 per cent in 2007. They are typically instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in Indian markets without registering themselves directly in India to save on time. But, they still need to go through a proper due diligence process. Acting upon recommendations of the Supreme Court-appointed Special Investigation Team on black money, Sebi also tightened the due-diligence requirements for issuance and transfer of these instruments and put the onus on the original issuer for compliance to Anti-Money Laundering Regulations.

Meanwhile, with Sebi tightening norms for P-Notes, the regulatory regime for these offshore instruments for investing in Indian markets has become more stringent than in any other part of the world. 

There are apprehensions that the stricter set of norms will make it costlier to invest in India through P-Notes as one of the major attractions of such instrument is cost-effectiveness and easier access. Apart from the requirement of reporting about positions of offshore derivative instruments (ODIs) -- commonly known as Participatory Notes or P-Notes -- now the issuers are required to provide details about the end beneficial owner and comply with onshore KYC norms. The latest changes would make the regulatory framework in India more stringent than many developed and developing nations. 

In China, Taiwan, Korea, Germany, the UK and the US, among other countries, the norms pertaining to onshore KYC requirements for ODI issuers do not compulsorily require disclosure of details about the ultimate beneficial owner, as per an analysis by Sebi. P-Notes are typically instruments issued by registered foreign institutional investors to overseas investors who wish to invest in Indian markets without registering themselves directly in India to save on time. But they still need to go through a proper due diligence process.

At about Rs 2.2 lakh crore, P-Notes now make up for about 10 per cent of total foreign investment inflows as against over 55 per cent at the peak of stock market bull run in 2007. Sebi’s board on Thursday further tightened its norms to check any misuse of controversy-ridden P-Notes.