Here's what FM Arun Jaitley said about P-notes, revised Financial Code draft

Seeking to calm panic-stricken investors, Finance Minister Arun Jaitley today said they need not fear any "knee-jerk" reaction from the government on the SIT report, which had recommended tough measures to check investment flows through P-Notes.

He also assured investors that the government will not take any action that may jeopardise investment climate even as the benchmark BSE Sensex tanked close to 500 points on fears of action on the suggestions of the Supreme Court appointed Special Investigation Team (SIT).

Participatory Notes

(P-Notes) are used by large number of foreign investors to invest in equity markets without disclosing their identity to the market regulator Sebi.

"It is too early to say what view the government would take. But the it will certainly not take any such action in a knee-jerk reaction, particularly one which has any adverse impact on investment environment," Jaitley told reporters in his Parliament House Office.

Meanwhile, Revenue Secretary Shaktikanta Das too said there was no need to "panic", and the Finance Ministry will take a view on the SIT suggestions only after consultations with Sebi, RBI and other institutions.

The SIT had suggested Sebi to put in place regulations to help identify individuals holding participatory notes or offshore derivative instruments (ODIs), and take other steps required to curb black money and tax evasion through the stock market route.

The BSE tanked 494.52 points or 1.76% to 27,617.79 in afternoon trade, while rupee fell to 64.03 against the US dollar in late morning deals.

Das also said: "at the moment there is no need to panic."

We will take views after consultation with stakeholders including Sebi, RBI and related institution... There is no need for markets to react in any particular manner".

A similar recommendation in 2007 had triggered a major collapse in the stock market, prompting the then Finance Minister P Chidambaram to announce that no such measures would be taken by the government.

Investments through P-Notes into India's capital market had touched a seven-year high of Rs 2.85 lakh crore in May. It was Rs 2.75 lakh crore at the end of June.

P-Notes make up mostly 15-20% of the total FII investment in India since 2009. However, it used to be much higher -- 25 to 40% -- in 2008.

Till a few years ago, P-Notes used to account for more than 50% of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations. The reading was as high as over 50% at the peak of stock market bull run in 2007.

Jaitley said the recommendations made by the SIT on black money will come up to the government and "the government will apply its mind in due course keeping in mind the investment environment of the country as also the objective behind the SIT recommendations and then take a final view on the matter." He said the government would not take any such step "which could adversely impact investment sentiment".

The Revenue Secretary too sought to calm the jittery markets, saying there should be no uncertainty in market as presently status quo prevails.

"There is no reason for the market to react adversely... There will be due stakeholder consultation and after that the government will take a decision. So there is no reason at this point in time to pre-judge which way the government is going to decide. There is no reason for the market to react adversely," Das said.

P-Notes, mostly used by overseas HNIs (High Net Worth Individuals), hedge funds and other foreign institutions, allow such investors to invest in Indian markets through registered Foreign Institutional Investors (FIIs).

This saves time and cost for them, but on the flip side is the route can also be used for round-tripping of black money.

Das further said that over the years the tax havens have posed a challenge to the tax authorities and the revenue department is identifying possible sources of black money generation and taking necessary actions.

He said India has recently signed FATCA with the US, besides entered into multi-lateral agreements on automatic exchange of information and double taxation avoidance agreements. 

Indian Financial Code revised draft

Finance Minister Arun Jaitley today said that the government will take a view on the draft Indian Financial Code, which proposes to dilute powers of the RBI chief, after receiving comments from stakeholders.

"FSLRC has made its recommendations, which have been made public for comments. After the comments are received, it is only then that the government will take a view," he told reporters here.

The draft had proposed taking away Reserve Bank chief's authority to veto the interest rate decision of the central bank's monetary policy committee.

The revised draft of Indian Financial Code (IFC) also proposed that the committee would have four representatives of the government and only three from the central bank, including the 'RBI Chairperson'.

The draft talks of 'RBI Chairperson' and not 'RBI Governor'. RBI is headed by a Governor, at present.

The revised draft of IFC, released by the Finance Ministry last week, is based on the recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice B N Srikrishna.

The IFC, which is conceived as an overarching legislation for the financial sector, proposes a monetary policy committee which will be entrusted with the task of deciding the key policy rate and chasing the annual retail inflation target to be decided by the government in consultation with RBI.

Further, it said the RBI "must constitute a Monetary Policy Committee to determine by majority vote on the Policy Rate required to achieve the inflation target".

At present, the RBI Governor consults a Technical Advisory Committee, but does not necessarily go by the majority opinion while deciding on the monetary policy stance.