Tighter transfer norms for P-notes

The Security and Exchange board of India (Sebi) has notified new norms restricting transfer of P-notes to entities authorised for their use and after prior consent from the issuer foreign investor.

Participatory notes or Offshore Derivative Units are issued by Sebi-registered foreign portfolio investors to other overseas entities looking for an exposure to the Indian markets without getting registered directly to save on costs and procedures.

However, Sebi has tightened its norms substantially over the years about who can issue and who can subscribe to these instruments, amid long-standing concerns about their possible misuse for laundering of money. The regulator decided on the latest tightening of norms earlier this year after recommendations in this regard were made by the Supreme Court- appointed Special Investigation Team on black Money.

While some of the new amendments to the regulations governing P-Notes have already come into effect, Sebi has now notified one more change that was approved by Sebi's board recently.

As per the new notification, a foreign portfolio investor will have to ensure that any transfer of offshore derivative instruments issued by or on behalf of it, is made subject to two specific conditions -- such ODIs are transferred to persons fulfilling Sebi norms for subscription and a prior consent of the FPI is obtained for such transfer, except when the persons to whom the ODIs are to be transferred to are pre-approved by the FPI.

As per the Sebi regulations, no FPI can issue, subscribe to or otherwise deal in ODIs, directly or indirectly, unless they satisfy certain strict conditions.

As per these conditions, the ODIs can be issued only to persons who are regulated by an appropriate foreign regulatory authority and they can be issued only after compliance to the prescribed 'know your client' norms.

Also, only the top-two categories of FPIs, including sovereign funds, central banks and multi-lateral institutions, and certain broad-based funds including insurers and pension notes, can issue or deal in ODIs.

The Category III FPIs, which mostly include hedge funds and individual investors, cannot issue, subscribe to or otherwise deal in ODIs, directly or indirectly.

All these conditions would now also apply for transfer of the ODIs.

These instruments used to be very popular at one point of time, accounting for over 50 per cent of total foreign portfolio investments coming into Indian markets, but their share has now fallen to below 10 per cent now after several rounds of tightening of norms.