SEBI tightens norms for issue of participatory notes

The Securities and Exchange Board of India (SEBI) has tightened norms for issue of participatory notes (P-Notes) by overseas investors, in order to bar "unregulated" foreign funds from dealing in offshore derivative instruments even if their investment managers are appropriately regulated by their concerned regulators.

SEBI has revised the position it had taken in its earlier draft on foreign portfolio investors (FPI), and has also barred certain entities under Category-II FPIs from issuing P-notes.

The regulator had, in the draft guidelines taken up at is October board meeting, barred only Category-III FPIs from issuing P-notes. However, the gazette notification, which has given the FPI framework an official status bars some Category II FPIs as well.

"Provided that those unregulated broad-based funds, which are classified as Category-II foreign portfolio investor by virtue of their investment manager being appropriately regulated, shall not issue, subscribe or otherwise deal in offshore derivatives instruments directly or indirectly," SEBI stated in its final FPI regulations.

Participatory notes, or offshore derivative instruments, are used mostly by high net worth foreign investors that are not registered with SEBI.

The guidelines, which are part of the newly notified Foreign Portfolio Investor (FPI) Regulations, have come into force with immediate effect.

They guidelines provide for stricter oversight of P-Notes, the preferred route for overseas HNIs and hedge funds for investing in the Indian market.