KYC rules to be improved for P-notes

SIT has recommended tighter KYC norms and scrutiny of final beneficial owners of P-notes to curb money laundering using these instruments

New Delhi: The finance ministry is in talks with the central bank and the stock market regulator to improve know-your-customer (KYC) requirements for participatory notes (P-notes), but has no plans to clamp any abrupt ban on the instruments used by foreign investors to indirectly invest in Indian stocks, revenue secretary Shaktikanta Das said on Thursday.

A special investigation team (SIT) set up by the Supreme Court to unearth black money has recommended tighter KYC norms and scrutiny of final beneficial owners of P-Notes to curb money laundering using these instruments.

Expressing concern that some of the money coming into the Indian stock markets via P-notes could be unaccounted wealth rerouted into India as foreign investment, the SIT suggested a central KYC registry that will link different identity proofs of an individual and track details of all financial transactions at one place in an attempt to curb tax evasion.

Proposed curbs on P-notes in the past have caused sell-offs in the stock market, and the revenue secretary ruled out any abrupt ban on the instruments.

“It is nobody’s intention to ban P-notes overnight. We do understand the consequences of this. The government will not do anything that goes against its effort to unleash the growth potential. Over the years, Securities and Exchange Board of India (Sebi) has improved the KYC process for P-notes. But SIT feels that the KYC regime needs to improve. The government will see how to improve the KYC process," Das said at a conference organized by industry body Assocham.

“The government will also have interaction with all market players and financial institutions before arriving at a final decision," Das said.

A P-note is a derivative instrument issued by a foreign portfolio investor against underlying Indian securities, which allows these investors to earn returns on investment in the Indian market without undergoing the significant cost of directly investing in India.

The SIT recommended that the information of ‘beneficial owner’ with Sebi should be in the form of an individual whose KYC information is known to Sebi and not KYC information that ends with the name of the company. It also opposed the practice of allowing transfer of P-notes from one person to another, saying this makes the identification of the end beneficiary more difficult.

The stock markets tanked following the SIT’s recommendations last month. Finance minister Arun Jaitley then assured investors that the government will not take any hasty decision and would bear in mind the investment climate of the country when it does act.

Around 2.7 trillion of foreign investments coming into Indian stocks is through overseas derivative instruments, as per data available till July with Sebi.

Lalit Kumar, a partner at J. Sagar Associates, said that P-note beneficiaries are well regulated by Sebi even now. “Even the current Sebi regulations provide for disclosures regarding P-notes. Therefore, foreign investors are aware of these requirements and any additional disclosures should not sharply affect the money flow. As long as there is no ban on P-notes as was done in 2007, the money will continue to flow in," he said.