Mumbai: Allaying concerns about any further misuse of Participatory Notes, market watchdog Sebi's Chairman U K Sinha has said Indians can no longer use these offshore instruments, even indirectly, and a strong safety net has been put in place to check any routing of black money.
He also said that foreign investors have been taken "completely on board" for changes in the regulations governing Offshore Derivative Instruments (ODIs) commonly known as P-Notes and they have been consulted even for design of the reporting formats about investments through this route.
Sebi will soon finalise reporting formats as also the revised guidelines and new circulars, for Foreign Portfolio Investors (FPIs) dealing in ODIs, after incorporating the changes approved by its board earlier this month.
While foreign investors can register themselves as FPIs to invest directly in India, ODIs are typically market-access instruments preferred by those looking to save on time and operational costs involved with a direct registration.
Sebi rules allow certain classes of FPIs to issue ODIs after a proper due-diligence process that has been further tightened now to address the concerns raised by the Special Investigation Team (SIT) on Black Money.
In an interaction here, the Sebi Chairman said India wants to encourage and promote long-term investments and would prefer foreign investors to come directly, but there will be no roadblocks for genuine investments even through PNs.
Ruling out any special concession for the investors using this route, including for hedge funds, Sinha said if some investors have a genuine reason such as 'testing the Indian waters' they can use ODIs after complying with the due KYC and other regulatory requirements.
"In the past, this route was misused by some Indian nationals and Indian corporates for getting their ill-gotten money rerouted to the Indian markets. "The intention was also to put money into their own firms so as to manipulate the share prices.
As late as 2007-2008, we found some such cases and took action," Sinha said. "Now, Sebi has got the information and a guarantee from the foreign investors issuing ODIs that not a single Indian has been issued such instruments and they would not be allowed to subscribe to these instruments, directly or indirectly.
"Earlier, there were also cases about some hedge funds camouflaging their identity and come through this route, but that is also not possible now and Sebi has got full details till the last possible end beneficial owner," he added.
ODIs now account for investments worth Rs 2.12 lakh crore in Indian markets, which is 9.3 per cent of the overall FPI investments down from a peak of over 55 per cent in 2007. Sinha said he sees this percentage falling even further, as foreign investors are preferring the direct route and hundreds of new FPIs are getting registered every quarter.
Even among FPIs, broad-based funds with low-risk profile account for well over 95 per cent of investments into the Indian markets at about Rs 22 lakh crore, while presence of high-risk investors such as hedge funds is very small – both in terms of their number as well as the investments.
