SEBI(Security Exchange Board Of India) Issues Stricter norms For P-Notes

• Markets regulator SEBI has put in place a stricter KYC and disclosure regime for Participatory Notes to make it tougher to use these offshore instruments without disclosing the money-trail and details of their users.
• These norms are formed after taking into account suggestions from the Special Investigation Team (SIT) on Black Money to ensure this route is not used for money laundering.
• Under the new norms, all the users of ODIs(Offshore Derivative Instruments) would have to follow Indian KYC and AML (Anti Money Laundering) Regulations, irrespective of their jurisdictions, while the ODI issuers will be required to file suspicious transaction reports, if any, with the Indian Financial Intelligence Unit, in relation to the ODIs issued by them.
• Presently, the details of ODI holders need to be mandatorily reported to SEBI on a monthly basis. SEBI has now decided that in the monthly reports on ODIs all the intermediate transfers during the month would also be required to be reported.
• Besides, ODI issuers will have to carry out reconfirmation of the ODI positions on a semi-annual basis. In case of any divergence from reported monthly data, the same should be informed to SEBI in a prescribed format.
• In order to bring about an uniformity in KYC/AML norms, it has been decided that Indian norms will now be applicable to all ODI issuers. These norms will be the same as that applicable for all other domestic investors.
• Also, ODI Issuers will be required to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the applicable threshold – 25% in case of a company and 15% in case of partnership firms, trusts or unincorporated bodies. In such cases, the ODI issuers will need to identify and verify the persons who control operations of these entities.
• About P-notes or Offshore Derivative Instruments (ODIs) :-
• P-Notes are derivative products issued by FPIs in foreign markets which give their holders the right to have a share of the profit and loss from underlying Indian stocks but at the same time help maintain anonymity about the actual owners of those notes. P notes are also called by the name of Offshore Derivative Instruments (ODIs)
• So, P-notes, or off-shore derivatives instruments (ODIs), allow foreign investors to take exposure to Indian stocks without registering with Sebi.
• Currently, around 10 per cent of foreign flows are through the P-note route.

Key Elements of the KYC

• Customer Acceptance and Customer Severance Policy
• Customer Identification Procedures;
• Monitoring of Transactions;
• Risk Management

Analysis:

• The measure was issued after taking into account suggestions from Special Investigation Team (SIT) on black money to ensure this route is not used for money laundering. In recent times ODIs have often been in controversy in India for alleged misuse for round-tripping of funds
• This will help SEBI to keep a penetrating eye on the investors and check the flow of black money and unwanted money from unknown persons in the Indian stock markets
• Though this stringent rule may have short-term effect on the capital market, but it would be a boon for honest investors and FIIs and market as a whole in the long run.
• The SEBI move is a balanced act since rather than imposing restrictions on the P-note issuance, which otherwise would have brought a lot of negativity in the market, it has concentrated more on strengthening the overall KYC checks and rightfully putting in more obligations on the issuer FPIs in the entire P-note issuance process

By: Vishal