P-notes: Sebi likely to review norms

In the wake of a recent report by the Supreme Court-appointed special investigation team (SIT) on black money, the Securities and Exchange Board of India (Sebi) is likely to review the regulations governing participatory notes (P-notes), according to a person with knowledge of the matter. "Sebi will consider closer scrutiny if found to be necessary."

An official request for comment, however, did not elicit a response.

The SIT had asked Sebi to examine whether the transfer of P-notes would be conducive for foreign portfolio investor flows. Sebi had in the past raised concerns on the misuse of P-notes.

In its report, the SIT was critical of barring entities that were using the stock exchange platform to evade taxes under the provision of long-term capital gains and suggested to Sebi to launch prosecution under the Sebi Act. Launching prosecution in these matters might not be possible quickly as the investigation in these cases is yet to be completed, said a source.  The regulator has started issuing showcause notice for hearings in the cases, leading to an interim ban of 900 entities from securities market. This will be followed up with a confirmatory order to be passed on to Sebi's investigation department. After the completion of investigation, it will be followed up with another round of hearing. Thereafter, the final order will be passed.

“The process of adjudication and prosecution would start only after the investigation is complete,” said the person cited above.

THE P-NOTE ROUTE
In absolute terms, the total value of participatory note holdings are up over Rs 22,000 crore over the year; though the increase over the last year is largely in line with the the rise in the markets and overall foreign flows. Evidence of this can be seen in the fact that their assets as a proportion of overall foreign flows has not changed significantly. The Supreme Court-appointed Special investigation team (SIT) has asked Sebi to bring in stricter norms for P-note investors. The SIT suspects that the P-note route is being used for the purpose of tax evasion. Any sudden move to clamp down on P-notes could lead to a knee-jerk impact on the market say experts.Here is a look at how much P-note investors have pumped into the Indian markets: