New SEBI norms on P-Notes make investors squirm

New Delhi: With SEBI tightening norms for P-Notes, the regulatory regime for these offshore instruments for investing in Indian markets has become more stringent than in any other part of the world. There are apprehensions that the stricter set of norms will make it costlier to invest in India through P-Notes as one of the major attractions of such instrument is cost-effectiveness and easier access.

Apart from the requirement of reporting about positions of offshore derivative instruments (ODIs) -- commonly known as Participatory Notes or P-Notes -- now the issuers are required to provide details about the end beneficial owner and comply with onshore KYC norms.

The latest changes would make the regulatory framework in India more stringent than many developed and developing nations. In China, Taiwan, Korea, Germany, the UK and the US, among other countries, the norms pertaining to onshore KYC requirements for ODI issuers do not compulsorily require disclosure of details about the ultimate beneficial owner, as per an analysis by SEBI.

P-Notes are typically instruments issued by registered foreign institutional investors to overseas investors who wish to invest in Indian markets without registering themselves directly in India to save on time. But they still need to go through a proper due diligence process.

At about Rs 2.2 lakh crore, P-Notes now make up for about 10 per cent of total foreign investment inflows as against over 55 per cent at the peak of stock market bull run in 2007. SEBI's board yesterday further tightened its norms to check any misuse of controversy-ridden P-Notes by making it mandatory for users of these overseas instruments to follow Indian anti-money laundering law and report any suspicious transactions immediately.

"The new norms are in line with suggestions made by SIT in its July 2015 report. These changes will not only make the route difficult to access India market, but also make it more expensive," Suresh Swamy, Partner Tax and Regulatory (financial services) at PwC India, said.

Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies. The SIT on black money last year had suggested that SEBI should further strengthen its norms to keep a tab on beneficial ownership of P-Notes as these were widely used by foreign investors and could be prone to misuse.