Government to discuss the SIT report on P Notes with SEBI and RBI

The government is planning a discussion with two regulators- SEBI and the RBI on the Participatory note issue. Last week, the Special Investigation Team appointed by the Supreme Court has identified P-Notes as a channel for black money investment in India.

P-Notes are instruments issued by registered foreign institutional investors to overseas investors who wish to invest in the Indian stock market. A major accusation against P Notes is that details of the investor remain unknown for the regulator.

Market analysts count that nearly 12 per cent of the money put by the investors are through P Notes.

Leading indices the Sensex and Nifty have shed nearly 5.5% on last Monday after the SIT report.  

Given the sensitiveness of the stock market on any action related to foreign investment, the Government’s objective is to tackle the issue without causing another shock in the market.

In its report, the SIT, led by former Supreme Court Justice MB Shah has hinted that the stock market is a major playing ground for black money.  Individuals holding P-Notes and offshore derivative instruments (ODIs) are using black money and thus promoting tax evasion through the stock market route. The panel urged SEBI to bring measures for finer norms to stop black money running through the market.

The SIT’s direct attack on SEBI necessitates follow up action from the regulator. In response to the observations made by the SIT, the SEBI Chairman UK Sinha, after a week’s time has came out with the regulator’s stand on the issue.

The Chairman mentioned that SEBI has progressively tightened rules governing participatory notes (PN) and is aware of the identity of their owners.

He has pointed out that the P Note investment is allowed only from countries that have complaints with the Financial Action Task Force (FATF). The FATF is an international body created to tackle money laundering and other financial crimes.

“We are getting on a monthly basis the names of who are the end investors. 
Secondly, through our FPI regulations in 2014, we have put further restrictions on who can issue PNs (participatory notes) and who can subscribe to a PN. Those restrictions are basically saying that only those who are having distributed ownership can issue PNs. Our position is that with these developments and restrictions, Sebi is in a position to know who the owners are,” added the SEBI Chairman.

The SIT report is not the first one that puts doubt about P Notes. Many committees as well as policy makers have made the same opinion previously.

The Finance Ministry feels that in the context of the SIT report, a sudden action will bring panic in the market. At the same time, some corrective measures are needed to tighten the norms.

The government on its part thus is on course of action to bring the stock market regulator SEBI and the FEMA administrator- the RBI on the same bench to discuss the issue.


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