The markets regulator SEBI (Securities and Exchange Board of India) has put in place a stricter KYC (Know Your Customer) norms and disclosure regime for Participatory Notes (P-Notes).
P-Notes are offshore/overseas derivative instruments (ODIs) issued by registered foreign institutional investors (FII) to overseas investors. They provide easier and cost-effective route to foreign investors to invest in Indian markets without directly registering as Foreign Portfolio Investors (FPIs).
- The aim of SEBI’s stricter KYC, disclosure norms is to make it tougher to use these offshore instruments that do not disclose the money-trail and details of their users.
- Under the new norms, all the users of P-Notes would have to follow Indian KYC and Anti Money Laundering (ALM) Regulations, irrespective of their jurisdictions.
- Henceforth, P-Note issuers will be required to file suspicious transaction reports with the Indian Financial Intelligence Unit.
- ODI holders have to report monthly reports on ODIs all the intermediate transfers during the month.
- Besides, ODI issuers have to carry out reconfirmation of the ODI positions on a semi-annual basis.
- 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.
- But since the SEBI made stringent norms in the recent years, they have also become less attractive.
- Earlier in 2007, ODIs used to account for as high as 55% of the total foreign fund flows in Indian capital markets, now their share has fallen to a record low level of 9.3%.