Sebi makes KYC norms mandatory for all P-Note issues

Securities and Exchange Board of India (Sebi) has tightened rules for investment in Indian equities by foreign investors through offshore derivative instruments (ODI), including participatory notes (P-notes) currently the most popular instrument for equity investments in India.

The board of the capital market regulator at its meeting on Thursday, said for all new issues, the P-note holders will now be subject to the same `Know Your Customer' (KYC) requirements as domestic investors, thereby further reducing room for manoeuvres.

Earlier, the KYC norms of the jurisdiction of the beneficial owner or of the ODI (P-note) issuer would have been sufficient for starters.

Sebi will also review KYC requirements on an annual basis based on the risk profile of the subscriber, except in case of low-risk investors.

If a certain beneficial owner holds more than 25 per cent of the company or 15 per cent of the trust / firm that issued the note, then the issuer should identify such owner.

Also, an owner or subscriber will have to now inform the ODI issuer if he / she is transferring the ODI to another offshore investor. Additionally, the ODI issuer has to inform Sebi of every single ownership transfer among its subscribers on a monthly basis.

Sebi has also now mandated that ODI issuers will have to inform an Indian Financial Intelligence Unit if it finds evidence of any suspicious transactions. Issuers will also have to put in place necessary systems that carry out a periodical review of controls, systems and procedures with regard to offshore derivative instruments

A P-note is an instrument used by a foreign portfolio investor to buy Indian stocks without registering itself with the Sebi.

Originally meant to encourage foreign investments in Indian stock markets, the regulator found it difficult to identify the ultimate beneficial owner of a P-note or how ownership has transferred. This has forced Sebi to slowly tighten norms from 2011 to restrict who can issue a P-note and reduce the opacity in its structure.

The tightening of norms, however, brought down the notional value of such investments in Indian securities by foreigners from a high of 55.7 per cent in June 2007 to 10 per cent in March 2016.

The Sebi board at its meeting also announced amendments to the norms for settlement regulations through consent. A consent mechanism refers to an out-of-court settlement procedure wherein entities pay a settlement amount without admission or denial of any wrongdoing.

Sebi has now clarified that this can only be allowed in cases where there is no market-wide impact on the alleged wrongdoing.

''The assessment of facts and circumstances while deciding the seriousness of the default in relation to an applicant shall take into account the weight and the sufficiency of the evidence,'' Sebi said. Additionally, Sebi said it is asking the central government to amend the laws with regard to the powers of an adjudicating officer of the regulator to decide the minimum and maximum monetary penalties.