Black money: Sebi tightens P-note norms to keep vigil on foreign investments

Tightening its norms to check any misuse of participatory notes (P-Notes) for laundering of black money, the Securities and Exchange Board of India (Sebi) on Thursday made it mandatory for users of these controversy-ridden overseas instruments to follow Indian anti-money laundering law and report any suspicious transactions immediately.

Acting upon recommendations of the Supreme Court- appointed Special Investigation Team on black money, Sebi also tightened the due-diligence requirements for issuance and transfer of these instruments and put the onus on the original issuer for compliance to Anti-Money Laundering Regulations.

The issuers would have to conduct periodic review and report the complete transfer trail of Offshore Derivative Instruments (ODIs) -- P-Notes -- to Sebi on a monthly basis in addition to the present requirement of reporting details of their holders.

P-Notes are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in Indian markets without registering themselves directly in India to save on time. But, they still need to go through a proper due diligence process.

At about Rs 2.2 lakh crore, P-Notes now make up for about 10% of total foreign investment inflows into Indian markets, as against over 55% at the peak of stock market bull run in 2007.

Rules have been tightened several times in recent years to check any misuse of this route, but P-Notes have still continued to court controversies.

Sebi chairman U K Sinha said the foreign investors have been "persuaded" with regard to the new changes and they are "willing to accommodate" on proposals made by the regulator.

Sebi's Board also approved a simpler set of norms for settlement and compounding of cases, as also a proposal to make it mandatory for top-500 listed companies to have a dividend distribution policy for their investors.

Other proposals approved by the Board included relaxation in norms for Infrastructure Investment Trusts and for exempting the stock exchanges from transferring 25% of their profit to the Core Settlement Guarantee Fund of Clearing Corporations.

In order to bring about an uniformity in the KYC/AML norms, it has been decided that Indian norms will now be applicable to all ODI issuers. These norms will be the same as that applicable for all other domestic investors.

Also, ODI Issuers will be required to identify and verify the beneficial owners in the subscriber entities, who hold in excess of the applicable threshold – 25% in case of a company and 15% in case of partnership firms, trusts or unincorporated bodies.

In such cases, the ODI issuers will need to identify and verify the persons who control operations of these entities.

As per existing regulations, ODI subscribers are not required to take prior permission of the issuer for transfer of ODIs to another investor offshore.

In order to tighten the ODI regime and have more control over issuance and transfer of ODIs, it has been decided that the ODI subscribers will have to seek prior permission of the original ODI issuer for further or onward issuance, as also for transfer of ODIs.

On KYC review, Sebi said it needs to be done on the basis of the risk criteria -- at the time of on-boarding and once every three years for low-risk clients and at the time of on-boarding and every year for all other clients.

On filing of Suspicious Transactions Reports (STRs), Sebi said ODI Issuers would need to file suspicious transaction reports, if any, with the Indian Financial Intelligence Unit (FIU), in relation to the ODIs issued by them.

The ODI Issuers would also be required to carry out reconfirmation of the ODI positions on a semi-annual basis.

On periodic operational evaluation, Sebi said ODI Issuers would need to put in place necessary systems and carry out a periodical review and evaluation of its controls, systems and procedures with respect to the ODIs.

The changes have been finalised after discussing with concerned stakeholders including some major issuers of P-Notes and they have broadly agreed to the suggested measures in the interest of the markets.