New Delhi/Mumbai: Moving into damage-control mode after the Bombay Stock Exchange (BSE) benchmark index Sensex tanked over 1.5% on Monday in afternoon trade, the government sought to assure investors that it will not take any hasty decision based on the Supreme Court-appointed special investigation team’s (SIT’s) recommendations on participatory notes (P-notes).

Finance minister Arun Jaitley said the government will take into account the impact on the investment climate while considering the SIT report on black money.

Markets fell on fears that the government and capital markets regulator Securities and Exchange Board of India (Sebi) will crack down on P-notes.

The SIT on Friday recommended that Sebi should have information on the final beneficial owners of P-notes and other offshore derivative instruments (ODIs), after concerns were raised that some of the money coming into the Indian stock markets via P-notes could be unaccounted wealth rerouted into India as foreign investment.

“It is too early to say what view the government will take. But it will certainly not take any such action in a knee-jerk reaction, particularly one which has any adverse impact on the investment environment," Jaitley said in a press briefing.

“The government will apply its mind in due course, keeping in mind the investment environment of the country as also the objective behind the SIT recommendations and then take a final view on the matter," he said, playing down fears of any immediate action by the government.

The government is expected to seek suggestions from Sebi and the Reserve Bank of India as well as market participants before taking a final view on the SIT’s recommendations.

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

The outstanding value of ODIs (offshore derivative instruments) at the end of February stood at 2.7 trillion. The Cayman Islands, the US, the UK, Mauritius and Bermuda are the top five locations for beneficial owners—Cayman Islands and Mauritius are widely perceived as tax havens.

“The information of ‘beneficial owner’ with Sebi should be in the form of an individual whose KYC (know your customer) information is known to the regulator. In no case should the KYC information end with the name of the company. In case a company is the holder of P-notes/ODIs, Sebi should have information of its promoters/directors who exercise effective control over the company," the SIT report had said.

Market analysts, too, allayed fears.

“The government has been very prompt in clarifying that it is only a suggestion. Government has made it very clear that no action will be taken unless all parties’ views are taken," said Deven Choksey, managing director and chief executive officer at KR Choksey Shares and Securities Pvt. Ltd.

“I think people are drawing conclusions too early based on recommendations. People should not pre-empt so much. Let the actual actions come in," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd, referring to the weak start in trade on Monday.

“I would not be comfortable assigning any implications. They are just seeking more disclosures, leading to more transparency. That is always a welcome move," added Sanghavi.

The SIT has raised concerns about the transferable nature of P-notes, pointing out that the transfer of P-notes makes tracing the beneficial owner more difficult. “Sebi needs to examine if this provision of allowing transfer of P-notes is in any way beneficial for easing foreign investment. Any investor wanting to invest through P-notes can always invest afresh through a foreign portfolio investor (FPI) instead of buying from a P-note holder," SIT said.

The SIT is of the view that since these instruments are traded overseas, outside the direct purview of Sebi, there are legitimate concerns about their ownership and the nature of funds invested in these instruments. Other SIT recommendations included stringent action against firms involved in money laundering via manipulation of stock prices and proactive detection of shell firms.

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