SEBI makes P-Note norms stricter to curb black money in markets

Securities and Exchange Board of India (SEBI) has barred resident as well as non-resident Indians (NRIs) from making investments through participatory notes (P-Notes). This restriction has been imposed through a new provision in the Foreign Portfolio Investment (FPI) regulations.

• The objective behind this decision is to prevent the misuse of P-Notes for routing domestic black money. Under current regulation, this restriction was in the form of ‘FAQ’. On insistence of Finance Ministry, SEBI inserted this new provision to clearly reflect the norm.

What are P-Notes?

P-Notes is an abbreviated term for Participatory notes. As P-Notes are instruments which enable overseas investor to invest in Indian stocks, they are also called Offshore Derivative Instruments (ODI).

• Foreign Institutional Investors (FIIs) registered in India can permit any overseas investor to invest in Indian stocks by issuing P-Notes to them. Overseas investors may comprise individual investors, hedge funds or any entity/individual who wishes to invest in Indian stocks.
• For overseas investors, it is much simpler to invest through P-Notes issued by registered FIIs rather than directly registering with SEBI.

Investments in India through P-Notes:

FIIs’ activity is still considered as primary driving force on Indian stock exchanges. In certain cases they even make or break the fortune of popular stocks. Funds brought in through P-Notes constitute a major chunk of FIIs’ investment in Indian stock exchanges.

• Earlier, SEBI announced that every P-Notes user should strictly adhere to anti-money laundering law and should immediately report any suspected breach.
• Due to tightening of norms by SEBI, investments through P-Notes have dropped significantly.
• For December 2016, P-Notes based investments in India stood at Rs.1.57 lakh crore marking a 12.43% drop as compared to November 2016.
• The December 2016 figure is the lowest since July 2013 which stood at 1.48 crore.

Quick Facts about SEBI:

• Formation Year: 1988 (as non-statutory body). It received statutory powers in 1992 through SEBI Act, 1992.
• Purpose: Regulation of Securities Market in India
• Headquarters: Mumbai
• Current Chairman: Ajay Tyagi