A committee headed by U K Sinha, chairman and managing director of UTI Asset Management Company, has recommended improvements in the process of registration for foreign investors wishing to enter India to reduce the use of the participatory notes.
“The working group strongly feels that streamlining registration processes with international standards could also remove the incentives to participate in markets such as those for participatory notes,” said the report.
Participatory notes or P-notes are instruments that allow one to take an exposure to India securities. They can be used by investors not registered with the Securities and Exchange Board of India, the regulator for stock markets in the country. Concerns have been raised over the instruments’ potential use for money laundering and terrorist financing.
According to the report, the focus of policymakers could be aimed at a more inclusive registration process under the qualified financial investor (QFI), such as relaxing the threshold for investors from the current $50 million or around Rs235 crore, so that levels of investment could rise even as use of P-notes fell.
If the recommendations of the committee are adopted in their current form, foreign investors would be registered and administered through a single window system as qualified foreign investors (QFIs). The distinction between foreign institutional investors, foreign venture capital investors and non-resident Indians would be removed.
Depository participants who would be responsible for enforcing know your customer (KYC) norms for these investors would have to pass a fitness test from the regulator and maintain higher capital requirements.
The committee drew attention to the fact that money invested in stock markets are sourced through bank accounts which have KYC norms. Entities which issue P-notes are also large-sized institutions which are present in international locations with anti-money laundering and combating financing of terrorism regulations in place.
“Additionally, foreign institutional investor (FII) investments into India continue to be subject to Indian anti-money laundering and KYC norms,” it said.
“A simpler process of registration is strongly recommended. In particular the KYC timeline could be shrunk while maintaining the thoroughness of the process itself,” said Punit Shah, head offinancial services tax practice at KPMG.
The Sinha report also noted that Sebi should have the right to demand details about the end investor in the case of investigations.
It has also suggested that the proposal to deem income of FIIs as income from capital gains should be broadened to cover all non-resident investors including private equity funds.As of July 2010, P-notes accounted for 17% of the Rs9.7 lakh crore of assets under management by FIIs.
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