Sebi tightens Pnote rule to curb black money via FII route
Sebi tightens P-note rule to curb black
Moneycontrol Bureau
With FII inflows through the participatory note (P-note) route hitting an 80-month high of Rs 2.65 lakh crore in October, Sebi has tightened rules relating to issuance of P-notes, also known as offshore derivative instruments. It is widely suspected P-notes are a conduit for bringing black money parked abroad, back into India.
P-notes are offshore derivative instruments issued by Sebi-registered FIIs to overseas investors who do want to register with Sebi for reasons legitimate or devious. The registered FII buys shares/derivatives on behalf of the unregistered players, and issues P-notes (a receipt of sorts) since the ownership of those shares/derivatives cannot be transferred to the unregistered players
Under the new rules, a Sebi-registered foreign portfolio investor (FPI) can now issue P-notes only to those entities based in countries where the securities regulator and central bank are members of globally recognized bodies like IOSCO and Bank for International Settlements (BIS).
Also, P-notes cannot be issued to entities residing in a country not compliant with Anti Money Laundering and Combating Financial Terrorism regulations.
Entities with opaque structures too will be ineligible for subscribing to P-notes. Sebi regulation defines "opaque structure" as one in which the details of the ultimate beneficial owners are not accessible or where the beneficial owners are ring fenced from each other or where the beneficial owners are ring fenced with regard to enforcement.
Protected cell company (PCC) or multi class structure is one example of an opaque structure. It is somewhat similar to the structure of a mutual fund offering different schemes depending on the risk profile of the investors. A PCC will have different pools of investments, each managed by a different fund manager.
Corporates looking to bring back their illegal money stashed abroad usually subscribe to one cell of a PCC, and direct thefund manager on the trades to be done.
Under the new rules, two or more P-note subscribers having common Beneficial Owner (BO) shall be considered together as a single P-note subscriber. No FII is allowed to hold more than a 10 percent in a listed company. In cases where a Sebi-registered FII holds positions through P-notes, the investment cap will be applicable on the aggregate of the positions held as an FII as well as a P-note subscriber.
Below is the transcript of Siddharth Shah's interview with Latha Venkatesh on CNBC-TV18.
Latha: How have you read this rule? Is Securities and Exchange Board of India (Sebi) tightening the screws and will this thin down the flow of participatory notes (p-note) money?
A: The way we interpret the circular is in one sense trying to align the requirements for a direct access is an foreign portfolio investment (FPI) versus an indirect access to offshore derivative instruments (ODI). To that extent it has created kind of a level playing field and while doing so it has eliminated certain ambiguities and flexibility which is existed for ODI investors in terms of the eligibility criteria.
The one thing that it has done is which entities will be eligible to subscribe to ODIs, was a little open ended with lack of clarity under the regulations. So, it did not put any limitation on the jurisdictions where the entities incorporated would be eligible to buy ODIs. What the circular has now clarified that those entities which are regulated and incorporated in those jurisdictions which are Financial Action Task Force (FATF) compliant, are members of International Organisation of Securities Commission (IOSCO) only those entities will now be eligible.
Latha: Are there any prominent flows of p-notes from countries which are not part of the BIS, Bahamas, these are the names that come to the mind. Can you name some names?
A: I think there are a few jurisdictions which may not be part of the BISsettlement and that includes one of the names like you mentioned Bahamas and a few other jurisdictions including some the Gulf countries for that matter may not find themselves eligible going forward to be able to subscribe to ODIs.
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Moneycontrol Bureau
With FII inflows through the participatory note (P-note) route hitting an 80-month high of Rs 2.65 lakh crore in October, Sebi has tightened rules relating to issuance of P-notes, also known as offshore derivative instruments. It is widely suspected P-notes are a conduit for bringing black money parked abroad, back into India.
P-notes are offshore derivative instruments issued by Sebi-registered FIIs to overseas investors who do want to register with Sebi for reasons legitimate or devious. The registered FII buys shares/derivatives on behalf of the unregistered players, and issues P-notes (a receipt of sorts) since the ownership of those shares/derivatives cannot be transferred to the unregistered players
Under the new rules, a Sebi-registered foreign portfolio investor (FPI) can now issue P-notes only to those entities based in countries where the securities regulator and central bank are members of globally recognized bodies like IOSCO and Bank for International Settlements (BIS).
Also, P-notes cannot be issued to entities residing in a country not compliant with Anti Money Laundering and Combating Financial Terrorism regulations.
Entities with opaque structures too will be ineligible for subscribing to P-notes. Sebi regulation defines "opaque structure" as one in which the details of the ultimate beneficial owners are not accessible or where the beneficial owners are ring fenced from each other or where the beneficial owners are ring fenced with regard to enforcement.
Protected cell company (PCC) or multi class structure is one example of an opaque structure. It is somewhat similar to the structure of a mutual fund offering different schemes depending on the risk profile of the investors. A PCC will have different pools of investments, each managed by a different fund manager.
Corporates looking to bring back their illegal money stashed abroad usually subscribe to one cell of a PCC, and direct thefund manager on the trades to be done.
Under the new rules, two or more P-note subscribers having common Beneficial Owner (BO) shall be considered together as a single P-note subscriber. No FII is allowed to hold more than a 10 percent in a listed company. In cases where a Sebi-registered FII holds positions through P-notes, the investment cap will be applicable on the aggregate of the positions held as an FII as well as a P-note subscriber.
Below is the transcript of Siddharth Shah's interview with Latha Venkatesh on CNBC-TV18.
Latha: How have you read this rule? Is Securities and Exchange Board of India (Sebi) tightening the screws and will this thin down the flow of participatory notes (p-note) money?
A: The way we interpret the circular is in one sense trying to align the requirements for a direct access is an foreign portfolio investment (FPI) versus an indirect access to offshore derivative instruments (ODI). To that extent it has created kind of a level playing field and while doing so it has eliminated certain ambiguities and flexibility which is existed for ODI investors in terms of the eligibility criteria.
The one thing that it has done is which entities will be eligible to subscribe to ODIs, was a little open ended with lack of clarity under the regulations. So, it did not put any limitation on the jurisdictions where the entities incorporated would be eligible to buy ODIs. What the circular has now clarified that those entities which are regulated and incorporated in those jurisdictions which are Financial Action Task Force (FATF) compliant, are members of International Organisation of Securities Commission (IOSCO) only those entities will now be eligible.
Latha: Are there any prominent flows of p-notes from countries which are not part of the BIS, Bahamas, these are the names that come to the mind. Can you name some names?
A: I think there are a few jurisdictions which may not be part of the BISsettlement and that includes one of the names like you mentioned Bahamas and a few other jurisdictions including some the Gulf countries for that matter may not find themselves eligible going forward to be able to subscribe to ODIs.
Sent from BlackBerry® on Airtel
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