HSBC, UBS stop issuing P-Notes as India steps up clampdown

A number of foreign investors including HSBC and UBS have stopped issuing controversy-ridden P-Notes as regulatory and enforcement agencies step up their clampdown on misuse of this once-popular instrument among foreigners to invest in Indian markets.

Sebi has shared with the government for further action a list of foreign fund houses that are found to have issued the Offshore Derivative Instruments (ODIs), popularly known as Participatory Notes (P-Notes), to Indian nationals, while probe is on in several other suspected cases of NRIs/PIOs.

These instruments are not allowed to be issued to Indians, NRIs or Persons of Indian origins.

Besides, another list has been shared of the investors having parked large amounts of money, each worth over USD 100 million, through these instruments.

Sebi has stepped up its scrutiny of investors issuing P- Notes, as also those parking their money in Indian markets through this route, amid a stepped-up clampdown on their misuse for round-tripping illicit funds.

These instruments used to be very popular at one point of time among foreign investors who did not want to enter the market directly and used to invest through this route provided by registered FPIs.

Consistent tightening of norms, including as per the suggestions of the Supreme Court-appointed Special Investigation Team (SIT) on Black Money has led to a sharp decline in its share -- from 56 per cent about ten years ago to less than 7 per cent of overall foreign portfolio investments in Indian markets currently.

There was a drastic decline in the outstanding values of the ODIs from the month of October to December 2016.

Among others, JPMorgan saw the value of ODIs decline by 77 per cent, while the fall was 62 per cent for Societe Generale, 58 per cent for Bank of America, 51 per cent for Citicorp and 46 per cent for Goldman Sachs.

"The ODI issuer such as HSBC Bank Mauritius Ltd has stopped issuing further ODIs and has reported 'nil' outstanding values of ODIs as of December 31, 2016," a top official said, while adding that Swiss bank UBS is also said to have stopped issuing ODIs from January.

Sebi has seen the compliance cost for ODI issuing FPIs also increase due to consistent tightening of norms by the regulator, while simultaneous liberalisation of FPI norms have made ODI route "less attractive vis-a-vis taking direct registration".

Mauritius and Singapore based FPIs issue ODIs to overseas investors which comprised 87 per cent of FPI flows through this route, also because of favourable tax treaties.