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Government says not ‘much’ change required on P-Notes


New Delhi: There is no requirement for “much change” in the regulations for Participatory Notes as the existing norms make it ‘almost impossible’ to misuse this route, Finance Secretary Rajiv Mehrishi said on Friday.

The comments assume significance in the wake of the Supreme Court-appointed Special Investigation Team (SIT) on black money asking the capital market regulator Sebi to review its regulations on participatory notes to help identify the end-users of these instruments.

“Under the system which exists today, it’s almost impossible to have beneficial controls through P-Notes (without getting identified)… In my own opinion, the situation which exists today is not much of a cause for worry. There is no requirement of much change,” Mehrishi told a business news channel.

The SIT had raised concerns about possible manipulation of this popular offshore instrument for laundering purposes.

On Thursday, Revenue Secretary Shaktikanta Das had said the government is in consultations with Sebi and RBI on the SIT recommendations on P-Notes.

The government will also consult the FIIs before firming up its view, while it would examine how to improve the Know Your Client (KYC) requirement for P-Notes, Das had said.

Last month, Finance Minister Arun Jaitley had said the government is mindful of the impact on foreign investment in case of any action against P-Notes.

Stock markets had fallen sharply after SIT asked Sebi to put in place regulations to help identify individuals holding such participatory notes and take necessary steps to check black money and tax evasion through the stock market route.

P-Notes are issued by foreign portfolio investors registered with Sebi to other overseas investors who want to take a position in the Indian markets without any direct registration for trading in Indian markets. These instruments are popular as they provide a low-cost and easier route for investing in the Indian markets.

However, Sebi has put in place strong checks and balances to avoid misuse of this route, and P-Notes can be issued only after strong KYC requirements are followed and they can not be issued to high-risk investors.

In May, investments through P-Notes hit a seven-year high of Rs 2.85 lakh crore. It stood at Rs 2.75 lakh crore at the end of June. The offshore derivative instrument accounts for nearly 15-20% of the total FII investment in India since 2009.

Its share has fallen over the years after Sebi tightened disclosure norms and other related regulations.

It was as high as over 50% at the peak of stock market bull run in 2007.


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