According to Sebi data, in 2007, the share of P-notes accounted for more than 45% at `2.92 trillion of the total foreign portfolio investments that came into the Indian markets. It fell below 10% at `2.15 trillion in May 2016. Photo: Abhijit Bhatkelar/Mint
According to Sebi data, in 2007, the share of P-notes accounted for more than 45% at `2.92 trillion of the total foreign portfolio investments that came into the Indian markets. It fell below 10% at `2.15 trillion in May 2016. Photo: Abhijit Bhatkelar/Mint

Will participatory notes die a slow death?

More participants may distanc`e themselves from opting for P-notes, given the stringent disclosure and transfer norms

Once popular, participatory notes (P-Notes) have lost some of its appeal in the past few years, and the Securities and Exchange Board of India’s (Sebi’s) recently tightened norms may be the last nail in the coffin. In a bid to ensure the controversial P-notes are not used for money laundering, the market regulator has made it compulsory for P-note holders to follow Indian KYC (know-your-customer) and anti-money laundering laws. Also, it has issued curbs on the transferability of P-notes between foreign investors.

P-notes are also known as offshore derivative instruments. They are issued by Sebi-registered foreign portfolio investors (FPIs) to other overseas entities that are looking for an exposure to Indian markets without getting registered directly. This helps them to save on costs and time on procedures.

Sebi has been reviewing P-note norms time and again, making them stricter, which has led to participants opting out of it over the years.

According to Sebi data, in 2007, the share of P-notes accounted for more than 45% of the total foreign portfolio investments that came into the Indian markets. In May 2007, the number stood at 2.92 trillion. The share of P-notes has now fallen below 10% at 2.15 trillion in May 2016. The share was as high as 55.7% at 3.67 trillion near the peak of the last stock market bull run, in June 2007.

Another factor, the plunging of loopholes in tax treaties between India and countries such as Mauritius and Singapore, which were once tax havens, has led to the diminishing interest in P-notes, experts say.

In some cases, P-note issuers could also face challenges to pass on the right amount of tax cost to the P-note subscriber, according to Suresh Swamy, partner, financial services, PwC India. And now, given the kind of regulation on P-notes, it may not see lot of interest, he added.

Clamping down on black money has been a key agenda of the current government ever since it came to power in 2014. A decision to tweak P-note norms further was also taken after suggestions were made by the Supreme Court-appointed special investigation team on black money. Will P-notes, allegedly used to send black money into the country, die a slow death? Only time will tell. But, for now, more participants may distance themselves from opting for P-notes, given the stringent disclosure and transfer norms.

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