Sebi tightens rules for P-Note issue, proposes $1,000 regulatory fee

The Securities and Exchange Board of India's (Sebi) has proposed to tighten rules on offshore derivative instruments like P-Notes by imposing "regulatory fees" and prohibiting the sale of products that track derivatives, unless issued for the purposes of hedging.

Sebi today proposed to levy a regulatory fee of $1,000 for P- Note issued by foreign investors for every three years and bar issuance of such derivative-based instruments for speculative purposes, in order to check any misuse of these products for channelling black money.

Once adopted, the new rules would help the regulator curb controversial products created by banks to track Indian derivatives, shares and debt products for sale to overseas investors.

In a consultation paper issued today, SEBI proposed that P-Note issuers be given until 31 December to wind down these products, unless they were undertaken for hedging purposes.

P-Notes tracking equities and debt would be spared.

The proposed measures follow several other steps taken by the regulator in the recent past. The value of foreign investments through Participatory Notes or Offshore Derivative Instruments (ODIs) has already fallen to a four-month low of about Rs1,68,000 crore.

While such investments used to account for more than half of overall foreign portfolio investments at one point of time, their share has now fallen to just 6 per cent.

Sebi said its proposals were intended "to enhance the transparency in the process of issuance and monitoring of ODIs."

Although their popularity has waned, P=Note has still a significant source of investment because they have less stringent registration requirements than investing directly.

Sebi has been tightening ODI rules since 2014, including mandating that issuers provide more information about investors, while the government has moved to amend tax exemption treaties with countries such as Mauritius and Singapore.

Indian share markets have hit a series of record highs this month, fuelled by strong domestic retail investment.

But India is still popular with foreign investors who have pumped $8 billion into shares this year, and a net $12.6 billion into debt.