SEBI plans $1,000 fee on P-note issuers

Capital market regulator SEBI has proposed to levy a fee of $1,000 (around ₹64,000) each on participatory notes (P-note) or offshore derivative instruments to discourage foreign investors from using this route to channel money into the Indian market.

In a consultation paper issued on Monday, SEBI said it proposes to levy regulatory fees on FPIs (foreign portfolio investors) to enhance the transparency in the process of issuance and monitoring of ODIs (offshore derivative instruments).

Misused by some The regulator said a few investors are subscribing P-notes through multiple ODI issuers to escape the regulatory glare. A fee will discourage them from taking the ODI route and register themselves directly as FPIs instead.

P-notes are mostly used by overseas individual investors, hedge funds and foreign institutions to invest in the Indian securities markets through registered foreign institutional investors (FIIs). However, they have also been found to be used for routing of domestic black money back into the Indian economy. By imposing a fee, Sebi is hoping to discourage misuse. Registration would enable better monitoring by the regulator.

A series of regulatory changes to ensure some much-needed transparency have resulted in ODI issuance falling to a four-month low of about ₹1.68 lakh crore.

The regulatory changes, however, require investment in manpower and systems in order to make a quick analysis of the voluminous data being submitted by the ODI-issuing FPIs, it said.

SEBI incurs significant expenditure in terms of capital and manpower when it comes to monitoring of investments coming through the ODI route.

Justifying the fee, SEBI said it has put in place dedicated IT systems for ODI issuers to report identities and other details of subscribers.

While proposing to prohibit FPIs from issuing ODIs against derivatives for speculative purposes, SEBI has given them time till December 2020 to wind up ODIs issued against derivatives that are not for hedging purposes.

No room for speculation “It will be incumbent on ODI-issuing FPIs to ensure that the ODI is issued against those derivatives which are purely for hedging purpose and not for naked speculation. The ODI-issuing FPI shall put in place necessary system to ensure the same,” SEBI said.

At present, ODIs are issued against derivatives along with equity and debt. As of April 2017, ODIs issued against derivatives had a notional value of ₹40,165 crore — 24 per cent of the total notional value of outstanding ODIs.