May 13, 2016
India’s market regulator is said to be considering more stringent rules for participatory notes as part of efforts to check the flow of black money into stock markets.
Previous moves to intensify scrutiny of the instruments, which afford a greater degree of anonymity than other avenues of investment, have alarmed investors into pulling their money out or threatening to do so.
The Securities and Exchange Board of India ( Sebi ) is now looking to make it mandatory to collect ‘know your client’ ( KYC ) details of participatory note (P-Note) holders and is likely to take a decision to this effect at its board meeting scheduled for May 20, said people familiar with the matter. Experts said the move is likely to help hasten the eventual phasing out of participatory notes altogether.
“There is a lot of pressure on regulators globally to act against benami shareholders or those holding shares indirectly and round-tripping of money to and from various tax havens.” P-Notes have been under the tax department’s scanner due to their opaque nature. They play an important role in Indian markets, accounting for Rs 2.23 lakh crore of holdings by foreign institutional investors (FIIs) on March 31-2.28% of India’s market capitalisation.