Sebi eases P-Note regulations

Unregulated entities already been issued these can continue use, says regulator

The Securities and Exchange Board of India (Sebi) has said unregulated entities which have already been issued participatory notes (P-Notes) can continue to make use of these, despite the new regulations banning use of the instrument.

P-Notes or offshore derivative instruments (ODIs) are used by foreign investors wishing to invest in the Indian markets without registering with Sebi. The regulator had restricted their use to well-regulated entities under the new rules for foreign portfolio investors (FPIs).

“ODI positions under FII (foreign Institutional Investor) regulations can continue under the FPI regime,” according to a document dealing with ‘Frequently asked questions’ about the FPI regime on the Sebi website. “Also the subscribers who have subscribed to ODIs under FII Regulations can continue to subscribe to ODIs under the FPI regime,” it added.

Suresh V Swamy, executive director, tax & regulatory services, at PricewaterhouseCoopers, said: “There was some ambiguity on the status of existing P-note holders. This lends clarity to their position, grandfathering them into the new regulations, a positive for existing holders of P-Notes.”

Even existing entities which did not have positions through P-Notes, can continue to be issued these instruments, so long as they were registered as clients. Changes in investment managers would also not have an impact on their ability to make use of P-Notes, according to the document.

“ODI issuers may continue to issue ODIs to those subscribers even if there is a change in their investment manager, provided the incoming investment manager is a regulated entity,” it said.

The FPI regulations had limited the use of P-Notes by entities which were not well-regulated. “Those unregulated broad-based funds that are classified as Category-II FPIs by virtue of their investment manager being appropriately regulated shall not issue, subscribe to or otherwise deal in offshore derivative instruments, directly or indirectly,” went the notification on the new FPI regulations .

The new FPI regime replaced the earlier FII regulations and classifies foreign investors into three categories. Category-I deals with entities backed by foreign governments. Category-II is for entities regulated by Sebi’s counterparts in foreign jurisdications, such as their mutual funds. Those outside these two are in Category-III.

Foreign investors held Rs 2.07 lakh crore through the P-Note route, according to Sebi data for March.