The capital markets regulator the Securities and Exchange Board of India (SEBI) has notified rules to levy fee of $1,000 for each participatory notes (P-Notes) issued by foreign investors and bar issuance of such derivative-based instruments for speculative purposes to check any misuse of these products for channelising black money. The new measures, which follow a slew of other steps taken by the regulator in the recent past, come at a time when the investments in domestic capital markets via P-notes or offshore derivative instruments (ODIs) have surprisingly surged to a seven-month high of Rs 1.81 lakh crore at the end of May.
While such investments used to account for more than half of overall foreign portfolio investments (FPI) at one point, their share has now dropped to just a little over 6 percent. Still, worries remain that P-Notes are misused by some to channelise black money from abroad into the country through the stock markets. The regulator will levy a regulatory fee of $1,000 on each ODI subscriber, to be collected and deposited by the issuing foreign portfolio investor (FPI) once every three years, starting from April 1, 2017.
The markets regulator has amended SEBI (FPI) Regulations, 2014, to implement the decision. P-Notes are issued by registered FPIs to overseas investors who wish to be part of the Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process. Earlier, the board of SEBI has decided to prohibit ODIs from being issued against derivatives, except those which are used for hedging purposes.