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Sebi to levy fee on P-Note issuance, bar speculative deals

The value of foreign investments through Participatory Notes or Offshore Derivative Instruments (ODIs) has already fallen to a four-month low of about Rs 1.68 lakh crore.

business Updated: May 29, 2017 17:40 IST
SEBI logo outside the regulators’s office.
SEBI logo outside the regulators’s office.(HT photo)

Markets regulator Sebi on Monday proposed to levy a regulatory fee of $1,000 for each P- Note issued by foreign investors and bar issuance of such derivative-based instruments for speculative purposes to check any misuse of these products for channelising black money.

The proposed measures, which follow a slew of other steps taken by the regulator in the recent past, come at a time when the value of foreign investments through Participatory Notes or Offshore Derivative Instruments (ODIs) has already fallen to a four-month low of about Rs 1.68 lakh crore.

While such investments used to account for more than half of overall foreign portfolio investments at one point of time, their share has now fallen to just 6 per cent. Still, concerns remain that P-Notes are misused by some to channelise black money from abroad into the country through the stock markets.

In a consultation paper issued today, Sebi said it has been continuously making regulatory changes in order to ensure that the ODI route is not misused.

“These changes however, require investment in manpower and systems in order to make quick analysis of the voluminous data being submitted by the ODI issuing FPIs. Sebi incurs a significant expenditure in terms capital and manpower when it comes to monitoring of investments coming through the ODI route.

“Sebi has put in place dedicated IT systems for the ODI issuers to report the Beneficial Owners and other details of the ODI subscribers. We may therefore, levy regulatory fees on FPIs issuing ODIs and the group entities of such FPIs, which may be involved in taking underlying positions in Indian securities market.

“It is proposed that beginning April 1, 2017, for a period of every three years, regulatory fees of $1,000 be levied on each ODI issuing FPI for each and every ODI subscriber coming through such FPI.”

Sebi said quite a few ODI subscribers invest through multiple issuers and the proposed fee will discourage the ODI subscribers from taking ODI route and encourage them to directly take registration as an FPI.

Besides, Sebi has proposed to prohibit ODIs from being issued against derivatives for speculative purpose. Further, the ODI issuers would be given time till December 31, 2020, to wind up the ODIs issued against derivatives which are not for hedging purpose.

“It will be incumbent on ODI issuing FPI to ensure that ODI is issued against those derivatives which are purely for hedging purpose and not for naked speculation. The ODI issuing FPI shall put in place necessary system to ensure the same,” Sebi said.

Presently, ODIs are being issued against derivatives along with equity and debt. As of April 2017, the ODIs issued against derivatives had a notional value of Rs 40,165 crore, which is 24 per cent of the total notional value of outstanding ODIs.

The Securities and Exchange Board of India (Sebi) has sought suggestions from public on the proposals till June 12 and a final regulation will be put in place after taking into the considering views of all the stakeholders.

P-notes are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.

Last month, the board of Sebi had tightened the norm by barring resident Indians, NRIs and entities owned by them from making investment through P-notes.

The decision was part of efforts to strengthen the regulatory framework for P-notes, which have been long seen as being possibly misused for routing of black money from abroad.