The Securities and Exchange Board of India (Sebi) has tightened the rules governing participatory notes (P-notes) by cutting the time lag in reporting these transactions.
According to a circular issued yesterday, Sebi said foreign institutional investors (FIIs) will have to report monthly details of transactions done through P-notes within 10 days. Earlier, FIIs had a window of six months to report these transactions. The first such report will be for the month of October 2012, by November 10, 2012.
“FIIs issuing ODIs/PNs shall submit details of ODI/PN transaction report (Annexure A, B and C), along with the monthly summary report by 10th of every month for the previous month’s ODI transactions,” it said.
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Three annexures provide the format for reporting P-note activity, details of transactions and assets under management, respectively, under the heads of equity, debt and derivatives.
“The move would increase transparency. It is part of the regulator’s efforts to identify and monitor the beneficial owners of the shares held as closely as possible,” said C R Sasikumar, managing director and chief executive officer, SBI-SG Global Securities Services.
The Sebi move comes weeks after a white paper on black money by the central government identified P-notes as one of the routes through which illicit money transferred outside India returns here through a process called ‘round tripping’.
P-notes or overseas derivative instruments (ODIs) issued by FIIs are popular among foreign investors, since they allow these to earn returns in the Indian market without undergoing the significant cost and time implications of directly investing.
“These instruments are traded overseas outside the direct purview of Sebi surveillance, thereby raising many apprehensions about the beneficial ownership and the nature of funds invested in these instruments. Concerns have been raised that some of the money coming into the market via PNs could be unaccounted wealth, camouflaged under the guise of FII investment,” the white paper said.
The six-month lag in reporting was identified by some market participants as one of the factors affecting Sebi’s surveillance efforts. “The six-month lag in the information available is likely to reduce the strength of corrective action that can be taken by Sebi. These regulations thus, need to be modified to ensure information on downstream issuances is collected for the most recent month. This would ensure active surveillance and timely intervention as and when required by Sebi,” a market participant had said in a recent internal note on P-notes.
During the transitional phase, Sebi has allowed the reports for the months of December 2011 to April 2012 to be held with the existing six months’ lag.
For the months between May to September 2012, the transaction reports shall be given by November 10, the circular added.