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Sebi tightens rules on P-notes, to need separate registrations

Some long-standing concerns remained even after the regulator issued the new guidelines.

ET Bureau|
Updated: Nov 06, 2019, 08.05 AM IST
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To be sure, the regulator has also relaxed some KYC norms for FPIs.
India’s capitalmarkets regulator on Tuesday tightened rules on participatory notes (p-notes), or offshore derivative instruments issued by brokers to foreign investors not registered locally, while easing some operational norms for select overseas funds.

ET was the first to report last month on the likelihood of the Securities and Exchange Board of India (Sebi) tightening the rules governing pnote investments.

Sebi said late Tuesday that foreign portfolio investors (FPI) would have to make separate registrations for issuing p-notes for underlying derivatives. However, this requirement is waived for p-notes against underlying cash equities.

“Based on the new guidelines, some of the existing FPIs will have to get separate registrations if they want to issue p-notes based on derivatives,” said a tax consultant, who did not want to be named. “However, Sebi has not prescribed any relaxation for such separate registrations. This could escalate the compliance burden on some of the big FPIs. Since the KYC information is already available with custodians and Sebi, funds should not be made to wait 45 days for a registration.”

ET had reported last month that stricter rules would impact at least two of the top five p-note issuers in the Indian markets, which reportedly have a combined market share of around 30 per cent. The total value of p-notes issued stood at Rs 79,800 crore in August, Sebi data showed.

The regulator also said that an ODI-issuing (offshore derivative instrument) overseas investor, which hedges its ODI only by investing in securities held by it in India, cannot undertake proprietary derivative positions through the same FPI registration. Such an FPI must segregate its ODI and proprietary derivative investments through separate FPI registrations.

“An ODI-issuing FPI cannot commingle its non-derivative proprietary investments and ODI hedge investments with its proprietary derivative investment or vice versa in the same FPI registration,” Sebi said in the new operating guidelines posted on its website.

P-notes are derivative instruments issued by registered foreign portfolio investors to overseas investors to enable them to trade in Indian stocks without having to register with Sebi.

“No fresh derivative position, not in compliance with the above requirements, shall be allowed henceforth. FPIs have 90 days’ time from the date of publication of the Operating Guidelines to comply with the above requirements,” the Sebi order said. “Offmarket transfer of assets/positions will be allowed for FPIs intending to transfer assets/ position from one FPI account to another FPI account to comply with the above requirements.”

To be sure, the regulator has also relaxed some KYC norms for FPIs. It has exempted category I FPIs from submitting the information of their beneficial owners to custodians. Market participants said that the regulator has also given more clarity on the KYC documents that need to be collected for each category of offshore funds. The regulator has also put in place a data-privacy mechanism for sharing of KYC documents across market institutions, such as brokers and depositories. Going forward, all such data sharing will be consent based.

Further, global custodians have been allowed to rely on the documentation collected by their own bank in a different country. Hence, in some cases, leading global custodians will be able to onboard FPIs into Indian markets without any fresh KYC.

“We believe that clarifications such as reliance on information available from reliable public sources would make life much simpler for several investors,” said Sriram Krishnan, managing director, Deutsche Securities Services.

“Around 80 per cent of all FPIs, if not more, are likely to be in Category I, where for identification and verification of beneficial owners, the document number is not required to be provided.”

Some long-standing concerns remained even after the regulator issued the new guidelines.

“Several procedural clarifications have also been provided in the new guidelines, making the new FPI norms more robust and transparent,” said Tejesh Chitlangi, partner, IC Universal Legal. “However, some of the major industry concerns pertaining to continuing restrictions on majority NRI holdings in FPIs and less favourable treatment of non-FATF member jurisdictions, such as Mauritius, from the perspective of higher KYC and ODI restrictions continue.”

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