Participatory Notes: An overview
- Participatory Notes are instruments which are issued to foreign investors by Foreign Institutional Investors. This enables the investors to invest in Indian stock markets without registering with SEBI.
- Since these instruments facilitate investments in Indian stock markets from outside India, they are also called as Off-Shore Derivative Instruments.
- SEBI permitted the trading of such P-Notes since the year 1992.
The working mechanism of P-Notes
- Foreign Institutional Investors (FII) often use P-Notes to facilitate overseas investor participation
- An India-based individual or entity buys Indian security and issues P Notes to foreign investors. Hence, they become subsequent "owners" or "beneficial owners"
- Hence, without a registration with SEBI these foreign investors invest in Indian-stocks.
- Any dividends or gains that arise from such transfers move to the investors.
The SIT recommendations at a glance
- The Special Investigation Team (SIT) rolled-out the third report on steps to check black money.
- It stipulated cricket bettings, overseas investments through P-Notes, mispricing imports and exports as major attributes of black money. SIT also proposed an "appropriate legislature" to trim down cricket betting.
- In addition, the team also prescribed prosecution for unaccounted donations to charity, education or religious bodies.
SIT guidelines for SEBI
- SIT identified many factors as the cause of black-money and identified specific areas for SEBI to minimize it.
- The SIT proposed that SEBI, the capital market regulator must initiate prosecution proceedings and take legal actions against tax-evaders. Earlier, SEBI merely banned such evaders from the stock markets.
- SIT also recommended SEBI to have one "effective monitoring mechanism" to gauge unusual oscillations in stock prices.
P-Note curb proposal reminds of 2007 crash
Earlier in 2007, the Government held a discussion to restrict P-Notes and sensex dropped by 9% in a single session. The current proposal on P-Notes too is speculating a similar tumble.
SIT recommends a curb in P-Note transfers
- Supreme Court appointed Special Investigation Team (SIT) proposed that SEBI had to track-down the owners of Participatory Notes (P-Notes) and also restrict their transfers.
- The recommendation caused immediate panic in Dalal Street and as a result both BSE and NSE index slipped below their support levels.
- Revenue Secretary, Shaktikanta Das assured that SIT's recommendations have not yet been implemented.
STI announcement triggers panic
An announcement to curb P-notes triggered instantaneous psychological panic and BSE Sensex fell 300 points below the support level of 28000. Also NIFTY dropped below the conventional level of 8450.
Government says P-Notes regulatory framework is robust
- MoS for Finance Jayant Sinha said that the current regulatory famework for Participatory-Notes is robust, thereby indicating that there will be no change in the current rules.
- He said that SEBI had strengthened the P-Notes KYC norms over the years and so the identity of P-Notes holders is fairly good.
- These comments are important as SC had asked SEBI to review its P-Notes regulations.