SC notice to Centre, RBI & CBI on plea over participatory-notes

The Supreme Court on Friday sought responses from the Centre, Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and Central Bureau of Investigation (CBI) on a plea, seeking a direction that offshore portfolio investors, who invest in the Indian stock market through participatory-notes (P-notes), should not be allowed to withdraw the money till further orders.

A Bench of Justices Dipak Misra and C Nagappan issued the notice on the interim application, which was filed by advocate ML Sharma in his pending PIL, seeking CBI probe against Indian offshore bank account holders named in the Panama papers.

P-notes are derivative instruments issued by registered foreign portfolio investors to overseas investors to enable them trade in stock market here without getting registered with Sebi.

Sharma has referred to a recent proposal of the Sebi, which increases disclosure requirements for issuance of P-notes and said it would lead to siphoning of monies by investors. The new rules enable the regulator to check the complete transfer trail of P-notes money on a monthly basis. “Rs 25 lakh crore black money, which is floating in the stock market, would be siphoned off. FIIs are Indian investors who have invested through P-notes,” he said.

Besides seeking an ex-parte stay on the release or transfer of P-note amounts till further orders, the plea has sought a direction to the Finance Ministry and others including the CBI to “seize entire black money/participatory notes”.

“Issue direction to the CBI to seize entire records of participatory notes under their (Sebi and RBI, etc) control and to file their report before this court for further action and direction/prosecution,” the plea said. It has also referred to a SIT report on black money and said that Foreign Institutional Investors (FIIs) invest through P-notes since they allow them to earn returns on investment in the Indian market without undergoing the significant cost and time implications of directly investing in the India.

“That, in fact, over Rs 25 lakh crore P-notes are in circulation in India in stock/ financial market. It is black money and come under Money Laundering Act. But due to illegal protection by the Sebi, these are running and Sebi did not take an action till date,” it said. 

The application added, “Black money is an offence and holder of it is liable to be prosecuted under the PML Act coupled with seizure of the black money but, due to protection by the SEBI, the said black money is in circulation till date.” If disbursal of funds, pertaining to P-notes, is not stayed then a “large amount of black money, about Rs 25 lakhs crore P-notes” will disappear, it said.