Sebi tightens P-Note norms; eases FPI registration rules

Markets regulator Sebi today sought to curb the use of P-Notes by levying a fee of USD 1,000 each and barred their issuance for non-hedging or speculative purposes, but ruled out a complete ban on this controversy- ridden investment instrument.
It proposed, on the other hand, to relax entry rules for foreign portfolio investors willing to invest directly rather than via participatory notes (P-Notes) or offshore derivative instruments (ODIs), often seen as being a route for laundering black money.
Briefing reporters after the board meeting, Sebi Chairman Ajay Tyagi said the regulator is not looking at completely banning these instruments as some new investors tend to use them to test the Indian markets.

"Sebi would want foreign investors to come directly but P-Notes also have their usefulness," he said.
There have been demands from various political quarters to check the P-Note route, while a special investigation team on black money, constituted by the government on the Supreme Court directions, has also been asking Sebi to take steps to curtail misuse of these instruments.
The new measures, which follow a slew of other steps taken by Sebi in the recent past, come at a time when the value of foreign investments through P-Notes or ODIs had already fallen to a four-month low of about Rs 1.68 lakh crore by April-end.

While such investments used to account for more than half of overall foreign portfolio investments at one point of time, their share has now fallen to just 6 per cent. Still, concerns remain that P-Notes are misused by some to channelise black money from abroad into the country through the stock market.

Tyagi said the board has approved a proposal to tighten the rules for P-Notes through imposition of a regulatory fee on issuers of such instruments.
The regulator has decided to levy a "regulatory fee" of USD 1,000 on each ODI subscriber, to be collected and deposited by the issuing FPI once every three years, starting from April 1, 2017.

"Sebi shall amend Sebi (FPI) Regulations, 2014 to implement the decision taken by the board," Sebi said.
Also, the board has decided to prohibit ODIs from being issued against derivatives, except those which are used for hedging purposes. The regulator would issue a circular in this regard.
At the same time, Sebi has decided to relax the entry norms for FPIs willing to invest directly in Indian markets rather than through participatory notes.
It would ease some rules for FPIs including expanding the eligible jurisdictions for registration by including countries with diplomatic tie-ups with India.
The Securities and Exchange Board of India (Sebi) will float a discussion paper on easing registration of FPI.

He further said that FPIs have been demanding further simplification of the registration process.
Orbis Financial Corporation CEO Rajesh M Sharma said: "We welcome the SEBI Board's decision to work in consultation with the market in order to simplify the various processes."
With regard to ODIs, Sebi had said quite a few ODI subscribers invest through multiple issuers and the proposed fee will discourage them from taking this route and encourage them to directly take registration as an FPI.
Commenting on the decision, Sharma said, "This may encourage the foreign investors to come through FPI route to invest in India. Having said that simplification in the FPI registration process will help."

Presently, ODIs are issued against derivatives along with equity and debt. As of April 2017, the ODIs issued against derivatives had a notional value of Rs 40,165 crore, which is 24 per cent of the total notional value of outstanding ODIs.
P-Notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.
In April, Sebi's board had tightened the norms by barring resident Indians, NRIs and entities owned by them from making investment through P-Notes.

The decision was part of efforts to strengthen the regulatory framework for P-Notes, which have been long seen as being possibly misused for routing of black money from abroad.