P-notes may again hit market hard

The Special Investigation Team (SIT) headed by former Justice MB Shah, which was appointed by the Supreme Court to check the black money menace, issued its third report on 25th July 2015 stating that, "It is clear that obtaining information on 'beneficial ownership' of P-notes is of crucial importance to prevent their misuse. Securities and Exchange Board of India (SEBI) needs to examine the issue... and come up with regulations where the 'final beneficial owner' of P notes are known.” The panel also has a doubt that savvy tax evaders from India are using P-notes to invest their black money in Indian securities.

In response to this news the S&P BSE sensex sank more than 500 points on Monday (27th July). As per the media reports, Revenue Secretary Shaktikanta Das informed that,”the government was yet to take a call on the SIT's report on the instrument which is believed to facilitate investment of slush money into Indian financial markets.” 

What is P-notes ?
The Participatory notes (P-notes / PN) are financial instruments issued by registered foreign institutional investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator (SEBI). It is also called offshore derivative instruments because it is used outside India for making investments in shares listed in the Indian stock market. However, SEBI is not very happy about participatory notes because they have no way to know who owns the underlying securities. Regulators fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.

Earlier, on 16th October, 2007, SEBI proposed restrictions on PN which accounted for roughly 50 per cent of FII investment in 2007. However the proposals of SEBI were not clear and as a result sensex crashed by 9 per cent (1744 points) on (17th October 2007), which was the biggest intra-day fall in Indian stock-markets but recovered after the Government clarification and ended the day just down by 336 points. The next day (18th October 2007), the Sensex tanked by 3.83 per cent (717 points) and on 19th October 2007 the Sensex fell by 438 points to settle at 17559.98 at the end of the week, after touching the lowest level of that week at 17226.18 during the day.

The SEBI chief on 22nd October 2007 announced that, funds investing through PNs were most welcome to register as FIIs, whose registration process would be made faster and more streamlined. The markets welcomed the clarifications with an 879 point gain on 23rd October, 2007 thus signalling the end of the PN crisis. SEBI also issued the fresh rules regarding PNs on 25th October 2007 said that, “FIIs cannot issue fresh P-Notes and existing exposures were to be wound up within 18 months.”