SEBI READ­IES P-NOTE FRAME­WORK FOR GIFT CITY

Mar­ket reg­u­la­tor plans to re­lax norms for on­shore se­cu­ri­ties

Business Standard - - FRONT PAGE - PAVAN BURUGULA

Mar­ket reg­u­la­tor Sebi is ready­ing a frame­work for is­suance of par­tic­i­pa­tory notes (p-notes) from in­ter­na­tional fi­nan­cial ser­vices cen­tres such as GIFT City. It is in talks with FPIs, which act as is­suers of p-notes, sources said. The move comes at a time when In­dian bourses have ter­mi­nated li­cens­ing of in­dices and data-feed agree­ments with their for­eign coun­ter­parts. This will force over­seas in­vestors to ei­ther in­vest di­rectly or come through GIFT City to trade in In­dian se­cu­ri­ties. PAVAN BURUGULA writes

The Se­cu­ri­ties and Ex­change Board of In­dia (Sebi) is ready­ing a frame­work for is­suance of par­tic­i­pa­tory notes (p-notes) from the in­ter­na­tional fi­nan­cial ser­vices cen­tres (IFSCs) such as GIFT City. P-notes are de­riv­a­tive in­stru­ments that al­low over­seas in­vestors to in­vest in a do­mes­tic se­cu­rity with­out hav­ing to di­rectly reg­is­ter with Sebi. The mar­ket reg­u­la­tor is in talks with for­eign port­fo­lio in­vestors (FPIs), which act as is­suers of P-notes, ac­cord­ing to sources.

The move comes at a time when In­dian bourses, in­clud­ing the Na­tional Stock Ex­change (NSE), have ter­mi­nated li­cens­ing of in­dices and data-feed agree­ments with their for­eign coun­ter­parts.

The snap­ping of ties will force over­seas in­vestors, which use plat­forms like the Sin­ga­pore Ex­change (SGX) to trade in In­dian se­cu­ri­ties, to ei­ther in­vest di­rectly or come through GIFT City.

GIFT City is de­signed like an off­shore trad­ing plat­form with low trans­ac­tion cost. Know-your-cus­tomer (KYC) doc­u­men­ta­tion for p-notes is­sued from the IFSC would have to ad­here to anti-money laun­der­ing laws, sources privy to the de­vel­op­ment said. The reg­u­la­tor, how­ever, is ex­pected to do away with strict trad­ing re­stric­tions on these in­stru­ments.

At present, no p-note sub­scriber is al­lowed to take a de­riv­a­tives po­si­tion in

■ Sebi to soon come up with a frame­work for is­suance of p-notes from IFSC, Gu­jarat

■ The KYC­doc­u­men­ta­tion for p-notes from IFSC is likely to be on par­with p-notes is­sued by on-shore FPIs

■ How­ever, Sebi is ex­pected to re­lax­the trad­ing re­stric­tions on p-notes is­sued from IFSC

■ On-shore sub­scribers of pnotes are not al­lowed to take any po­si­tion in the In­dian de­riv­a­tives mar­ket

■ In­dian stock ex­changes re­cently ter­mi­nated

the mar­ket for any other pur­pose apart from hedg­ing. Also, there are re­stric­tions on trans­fer of p-notes from one in­vestor to an­other. Ac­cord­ing to ex­perts, since the IFSC is a typ­i­cal off­shore desti­na­tion where only de­riv­a­tives are traded, Sebi is open to a less-strin­gent li­cens­ing of in­dices and data-feed agree­ments with­for­eign bourses

■ FPIs look­ing to in­vest in In­dia can ei­ther in­vest di­rectly or through the IFSC GIFT City, which of­fers tax ben­e­fits and li­a­bil­i­ties

regime.

“Sebi re­cently con­ducted a meet­ing with some of the big FPIs that had sought the reg­u­la­tor’s per­mis­sion to is­sue p-notes from the IFSC. The idea was to pro­vide an en­try to those in­vestors who had lost trad­ing op­por­tu­nity due to the clos­ing of off­shore de­riv­a­tives trad­ing plat­forms like the SGX,” said an­other source privy to the de­vel­op­ment.

There was still a huge ap­petite among global funds for in­stru­ments such as p-notes be­cause these did not amount to di­rect ex­po­sure, ex­perts said. De­spite the high KYC re­quire­ment, pnotes are still handy for in­vestors that do not want to have a di­rect ex­po­sure to the In­dian mar­ket due to re­stric­tive laws in their own coun­tries. P-notes also of­fer a cost ad­van­tage for funds that in­vest a mar­ginal amount of their port­fo­lio in In­dian se­cu­ri­ties.

“The ini­tial rules for p-note is­suance from the IFSC could be much sim­pler with fewer re­stric­tions on is­suers since the whole con­cept was at an evo­lu­tion­ary stage. Once the in­stru­ments gain trac­tion, the reg­u­la­tors con­cerned could con­sider tight­en­ing rules fur­ther,” said Te­jesh Chit­langi, part­ner, IC Le­gal Uni­ver­sal.

The share of p-notes in to­tal FPI in­vest­ment has gone down sig­nif­i­cantly in the last decade with In­dian reg­u­la­tors crack­ing down on their mis­use. A decade ago, p-notes ac­counted for half of to­tal FPI in­flows. Now they just ac­count for just 3.7 per cent.

Sebi in 2016 tight­ened KYC norms for p-notes. P-note is­suers were asked to fol­low In­dian anti-money laun­der­ing rules. Sebi also made it manda­tory for FPIs to dis­close the end beneficiary of Pnote sub­scribers.

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